Forward Contracts and Risk Managment
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Compare and contrast at least two risk management tools and techniques from forward contracts.
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Solution Summary
Provides two examples of risk management tools and techniques from forward contracts.
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Example 1.
We will consider a commodity forward, and we use this to hedge our position. Suppose I produce some goods that require sugar. Sugar is an exchange traded commodity, so its price changes quite dramatically over time. This is obviously bad for my factory, because I don't know how much I should charge my buyers. We could sign a contract today, and by the time I am starting to ...
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