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    Managing risk and enhancing returns

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    Choose an existing company and discuss the use of derivatives as a means to manage risk and enhance returns.
    In your answer discuss how options, forwards and futures can be used to manage the risk of the selected company.

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    Derivative instruments used by Costco Wholesale Corporation to minimize the risk aroused due to exchange rate fluctuations and the fluctuation in the price of electricity and natural gases.

    Costco Wholesale is the biggest wholesale club operator in the United States. It operates about 565 membership warehouse stores that serve some 56 million cardholders in almost 40 US states and Japan, Mexico, Puerto Rico, Australia, Canada, South Korea, Taiwan, and the UK, primarily under its brand name of Costco Wholesale.

    As the company has operations outside US, it is exposed to foreign currency exchange-rate fluctuations in the normal course of its business operations. There are three types of exchange rate risks and these risks are transaction, translation and economic. In order to minimize the risk aroused due to foreign currency exchange rate fluctuation companies used various derivative instruments, if we look at reported US data among these instruments OTC traded currency forward is the most usable derivative instrument (almost 50% of all foreign exchange derivative used), then ...

    Solution Summary

    This solution discusses the use of derivatives as a means to manage risk and enhance returns.