Managing Risk with Derivatives Essay Example | Topics and Well Written Essays - 1250 words

Managing Risk with Derivatives - Essay ExampleThis paper attempts to discuss first deriveds as a tool for m itary chance management and its effectiveness in business take chances management.In the finance literature, hedge refers to a technique in which an investment is make in certain securities to reduce or eliminate the risk of loss resulting from the fluctuations in the price of another security by taking two countervail positions in the related security. Hedging is defined as a risk management strategy designed to offset risk of loss causing from fluctuations in the prices of commodities, currencies or securities ( LiPuma, 2004). Hedging helps to transfer the various risks without the need of purchasing any insurance policies. Hedging was commonly employ in the commodities market by the traders to reduce the risk of loss caused by fluctuations in the price of a commodity. It was used by the trader to buy as well as sell the equal quantities of the homogeneous commoditie s in two different markets at same time with the expectation that a change in price in future in nonpareil market will help to offset by an opposite change in the other market. only when now hedging could also be used in the securities and foreign exchange market. Source angiotensin converting enzyme of the instrument or tool used to hedge risk is first derivatives. ... Derivatives refer to the financial contracts or instruments that gather their value from the underlying asset like stocks, equity, bonds, commodities etc. Nowadays derivatives atomic number 18 also used by the investors and institutional borrowers. The people who use derivatives as a way of managing risk are called hedgers. The derivative instruments used for hedging purposes include forwards, futures, options, swaps and combination on these (hybrid). Derivatives are becoming increasingly important in foreign markets as a tool for risk management. Derivatives help lot to the corporate clients to separate their risks and transfer them to those who are ready to bear their risks. In addition to these derivatives are the cheapest and convenient means of hedging because in derivatives at that place is no actual delivery of underlying assets only the profit or loss on the derivative contract is adjusted. Moreover all the derivative instruments are very simple to operate without any visionary process in it. They can also be used by the companies to hedge their long tern risks (i.e., 10-15 grade risk), which enable the companies to focus more on management decisions other than funding decisions. Further all derivative instruments are low cost products and offer high liquidity to the companies. Due to these reasons derivatives have become one of the essential tool for the companies to hedge their complex exposures and volatilities that they have to face in the financial markets today. However it is seen that the derivative instruments in recent times have come under general scrutiny because of its misuse made by the companies in managing the financial risks. Hence depending upon how it is used the derivatives can be both advantageous