Financial Risk Management
Risk is a legitimate part of business activity because of the globalized volume of corporate structure. Multinationals are working in various foreign countries due to saturation of the local markets…
Following are the major sorts of instruments applied by organizations to manage the financial risks associated with business activity. Futures and Options In this type of instrument, one individual or business signs a contract with another one to purchase the commodity on some future date with an agreed-upon price. However, in futures both of the parties have to go through with the contract while in options both of the parties reserve the right to withdraw the contract upon paying in monetary terms.
Agreements: This instrument is localized in nature, and governments do not interfere with its transactions. Nevertheless, the purpose of these agreements is the same as that of futures and options, which is to hedge against fluctuations in the market price of the commodity or an industrial product. It is also important to note that these kinds of agreements are more common in economically distressed nations. But, recently they are intensively deployed in order to ensure a supply of raw material in US, which is necessary because of the prevailing recession in the local market.
So, it is safe to assume that businesses are preparing themselves for increasing adversities of the future by contracting with their suppliers on a long term basis, which also enables them to attain economies of scale as a result, driving their financial and operational costs down that allows them to lower their prices in order to increase their market share. Nevertheless, it is fascinating to acknowledge that various businesses are paying close attention towards managing financial risk through using statistical models in order to assess the current level of risk, which can disrupt the expected pattern of their cash flows (Benson & Oliver, 2004). However, they often lack the proper translation of this analysis into practical plans, so in this way they cannot benefit from the concept of derivatives effectively most of the times. On the other hand, manufacturing sector of Europe is using derivatives more extensively than American ones (SpricIc, 2007). The prime reason for this trend is prevailing and growing uncertainty of the European market as compared to that of America. Along with this, managers who deploy derivatives in order to evaluate the degree of risk in financial terms are viewed as trustworthy by stockholders because they consider it as the proper and desirable means of minimizing financial threats (Koonce, Lipe, & McAnally, 2008). However, managers are found to falter by not basing their business decisions on the results of derivative analysis, therefore portraying the image of rational business decision making when in reality it is not the case. At the same time, derivatives are not rated as an effective mean for minimizing the possibility of default (Yi, Lin, & Chen, 2008). Therefore, derivatives can only be utilized as the mean of predicting future financial position of a particular firm. However, it is important to note that firms that base their decisions on derivative analysis often outperform those that do not consider derivatives as an ideal method for predicting financial future (Lin, Pantzalis, & Park, 2009). Another advantage of successful risk management is contentment of stockholders (Berk, Peterlin, & Cok, 2009). Through effective management, risk managers can handle them and are ...
Cite this document
(“Use of Derivatives in Risk Management Term Paper”, n.d.)
Retrieved from https://studentshare.net/finance-accounting/74863-use-of-derivatives-in-risk-management
(Use of Derivatives in Risk Management Term Paper)
“Use of Derivatives in Risk Management Term Paper”, n.d. https://studentshare.net/finance-accounting/74863-use-of-derivatives-in-risk-management.
ion 18 References 21 Contents 23 Introduction 24 Implementation 24 Monitoring 25 Adjustment 25 References 27 Introduction The Company Andromeda Global Fashions Ltd. based in Texas in United States operates through a number of outlets spread along eight different countries.
The benefit of the strategy adopted from 2007 onwards. The return on the three asset portfolio: rp = wara + wbrb + wc rc Whereby rp is the return. ra is the return and wa is the weight on asset a. rb is the return and wb is the weight on asset b. rc is the return and wc is the weight on asset c.
That is to say that Tetra Tech’s client has already identified that the issue need to be remediated because of its potential danger, damage and hazard to the public or to its own employees or stakeholders. With this variable known, it is not only mandatory for Tetra Tech to exercise prudence in conducting a more detailed risk assessment to ensure the safe implementation of remediation or corrective measure it is expected that they exercise a level of professionalism, maturity and expertise.
The author of the paper states that medical staffs have the mandate to deal professionally when addressing the unlimited variants of medical cases with high risk task involvement. As a chief executive officer, the organization seeks to redefine, centralize, and streamline the current risk management program.
Such derivatives are majorly used for currency speculations and arbitrages or hedging foreign exchange risks, financial risks that are posed by exposure to unanticipated alterations within the exchange rates between two different countries (Levi, 2005). A derivative is one of the three main classifications of the financial instruments which are the debt (mortgages and bonds), and equities (stocks).
Currency Futures are although similar to Currency forwards, but have some distinctions. Future contracts are more standardized whereas Forwards are made specifically for individual clients by international banks and are thus customized. Moreover
Bonds are long-term debt instruments that pay the investor periodic dividends and return of principal at the end of the maturity period. Investing and financing in varying proportions of stocks and bonds is the way by which
It goes further to identify the activities that facilitated my understanding of the real options theory and other practical application matters connected to the real option theory.
In every business, the need to estimate the future
Therefore, businesses are sensible to deploy divergent risk aversion techniques in order to counteract these risks. The most common practice used for dealing with financial threats are derivatives, which help financial managers to assess different threats through
e occurrence of crisis of malpractice in mid-1970s; when healthcare centers experienced rapid increases in subsequently premiums and insurance, claims costs and exits of medical professionals. It is from this crisis that healthcare organizations developed the preliminary risk
4 Pages(1000 words)Term Paper
GOT A TRICKY QUESTION? RECEIVE AN ANSWER FROM STUDENTS LIKE YOU!
Let us find you another Term Paper on topic Use of Derivatives in Risk Management for FREE!