Purchase Solution

Use of Financial Derivatives

Not what you're looking for?

Ask Custom Question

1. Performance objective:

(a) How do companies use financial derivatives to manage some of their risks?
(b) Identify several types of derivatives.
(c) Why use an options contract rather than a forward contract?
(d) Why let a put option expire; why exercise a call option?
(e) Are swap agreements traded internationally? If so, then provide an example.

2. Problem-solving: Identify and describe two financial management practices that firms use to manage each of the following:

(a) liquidity risk;
(b) interest rate risk; and
(c) credit risk.

Purchase this Solution
Solution Preview

1a. Companies could use derivative as an insurance (hedging) purpose. For example: a US energy company would hedge the uncertainty of the profit they will receive from overseas by entering currency forward agreements to limit losses due to uncertainty in the exchange rate between two currencies.

b. Futures, Interest and currency swap, Options, Forward, warrants.

c. Options contract will give you a right to purchase/sell the underlying assets at certain price; forward contract will give you an obligation to purchase/sell the underlying assets at certain price that has been ...

Purchase this Solution
Free BrainMass Quizzes
Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

View More Free Quizzes
Related BrainMass Solutions

  • What is a derivative security? And, why is it important?

    Derivatives are a major form of financial activity, and the use of derivatives continues to grow considerably in comparison to other financial instruments.

  • The role of financial derivatives as a risk management tool

    492558 risk management: the role of financial derivatives as a risk management tool 1. Discuss the role of financial derivatives as a risk management tool.

  • Foreign Currency Translations and Derivatives

    For the past few years, corporate involvement in executory contracts has mushroomed, with the use of any number of derivative financial instruments.

  • Accounting derivivatives

    The mark to market is predicated upon providing the market with a realistic appraisal of the financial institution's current financial situation.

  • Traditional and derivative instruments

    Why do companies use derivative instruments? Are derivatives a good investment? Why or why not? A traditional financial instrument is a trading security equity (stock) or debt (bond).

  • Derivatives as a risk management tool

    To Keown, financial managers use futures and options to reduce risk. They use them to effectively offset future movements in the price of commodities and other forms of assets and consequently, eliminate risk.

  • Derivative and a derivative securities market

    Derivatives are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options, and swaps. The main use of derivatives is to reduce risk for one party.

  • Benefits & Pitfalls of Derivatives

    587794 Benefits & Pitfalls of Derivatives Why do companies use derivatives? How can these be beneficial to a company? How can they hurt a company?

  • GAP Inc

    Step 1 Information related to the company's derivatives is presented in Note 8 to the Financial Statements of Gap Inc.

  • IPO price, derivatives, liquidation value

    Under circumstances of uncertainty a company should use derivatives to hedge financial risk. If there is a risk of fluctuation of foreign exchange rates and the company is expected to receive/make payments it should use derivatives.

View More Related Solutions