Managing Financial Risks With Derivatives - Thesis Example

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Managing Financial Risks With Derivatives

According to the research findings in the current business environment markets have become increasingly global. Global data is increasing very fast with the establishment of a number of multinational companies. Although financial risk has increased significantly in recent years; risk and risk management are not contemporary issues. The result of increasingly global markets is that risk may originate with events thousands of miles away that have nothing to do with the domestic market. Quick changes in market reactions can be expected with availability of instantaneous information. The economic climate and markets can be affected very quickly through changes in exchange rates, interest rates, and commodity prices. Counter- parties can rapidly become problematic. As a result, it is important to ensure that financial risks are identified and managed appropriately. Preparation is the key component of risk management. Derivative is the widely used strategy adopted for risk management. It tends to avoid or minimize risk occurrences faced by the institutions. Usage of proper derivative instruments provides advantages of cheaper foreign exchange, cheaper interest rate and an opportunity to sell shares at flexible prices. Derivative instruments tend to transfer risk from the user to the providers. It is traded widely among financial institution and exchanges. Derivatives play a fundamental part an important role in the risk management of equity, bonds, or short term interest rates. ...Show more

Summary

The paper operates mainly based on research questions which can be stated as follows: How does the management of multi-national firms deal with financial risks and what role do the derivative instruments play in mitigating it?…
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