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The use of derivatives in risk management

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Kindly describe and or explain the use of derivatives in risk management.

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Solution Summary

This solution includes descriptions of uses of calls and puts to manage risk. The mechanisims and cost structure are also include.

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derivatives are investment tools that can be used to hedge risk. The two most commonly used are CALLS and PUTS.

A CALL is a right to buy a security at a named price and a Put is a right to sell a security at a named price.

For example, suppose you own 100 shares of Disney purchased for $30 a share. Factors such as the struggling economy and terror threats have you concerned that park attendance may suffer resulting in lower profits and a decline in stock value.

Every derivative has a price. The less likely the option will be exercised ...

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