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Financial Risk Management
Finance & Accounting
Pages 4 (1004 words)
ROLE OF DERIVATIVES IN MANAGING RISK WITHIN A BALANCED INVESTMENT PORTFOLIO Current financial market offers wide range of financial products to take the benefit of increased return as well as controlling risk. Finance professional have been adding value to balance sheets and portfolios with re-engineering the existing products with financial structures.
Businesses in order to increase the return or to reduce the level of risk associated with product (financial product) are increasingly making use of financial derivates in the respective portfolios. Among the range of derivatives being used in market following few derivatives are most commonly used (Culp, 2011): Futures contracts ( facilitating transfer of asset on future date at an agreed price) Options (Call option or put option facilitates the purchasing or selling option to buyer or seller to an agreed date and price. To mention as the name implies options are not obligations). Swaps (Exchange of cash flow with another cash flows for gaining the required benefit) Hybrid (derivates that mix the features of more than one securities with financial engineering) Using these and others financial product of derivative category suiting to the need of the business as well as individuals financial marketers take advantage of derivatives to develop desired fashion portfolio or value of balance sheet. Derivatives allow hedging of the risks from various domains. Such as market risk, interest rate risk, model risk etc (Functional Finances, n.d). ...
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