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Derivatives as a risk management tool

Use of derivatives as a risk managment tool

1. identify the main issues
2. specific current and/or future applications and relevance to the workplace

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DERIVATIVES: RISK MANAGEMENT TOOL

Main issues / descriptives

Derivatives, also called derivative securities are financial instruments that are not created by the company but are derived from another asset, interest rate, commodity, or exchange rate. These financial instruments are of two types- futures and options.

According to Keown et al. (2002), futures (also termed as futures contacts) may be used to lock in the following:

1. prices of commodities and raw materials that are used in production,
2. interest rates on debt, and
3. Exchange rate for sales abroad.

Other instruments that are considered as derivatives or derivative securities are options or options contracts. This kind of contract gives the owner the right to buy ...

Solution Summary

The expert uses derivatives as a risk management tool. The main issues are identified. A specific current and/or future applications and relevance to the workplace are examined.

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