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Questions and Answers
What do swaps, futures, forwards, and options have in common?
What do swaps, futures, forwards, and options have in common?
- They all agree now on what would be the price, but it would be implemented in the future (correct)
- They all require immediate implementation
- They are all types of underlying assets
- They all involve fixed prices for financial instruments
What does 'hedged' mean in the context of risk management?
What does 'hedged' mean in the context of risk management?
- Protection from risk (correct)
- Guaranteed profit
- Aggressive investment strategy
- Speculative trading
What is the primary reason for corporations to engage in risk management?
What is the primary reason for corporations to engage in risk management?
- Increase their use of debt
- Utilize their comparative advantages in hedging, compared to investors
- Reduce the risks and costs of borrowing (correct)
- Maintain their optimal capital budget
What does an option give the holder the right to do?
What does an option give the holder the right to do?
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What is the purpose of initiating compensation programs in the context of risk management?
What is the purpose of initiating compensation programs in the context of risk management?
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Study Notes
Derivatives
- Swaps, futures, forwards, and options are all types of financial derivatives that enable risk management and speculation.
Risk Management
- 'Hedged' means to reduce or mitigate potential losses or gains by taking counterbalancing positions in different markets.
Corporate Risk Management
- The primary reason for corporations to engage in risk management is to minimize potential losses and protect their assets from uncertain events.
Options
- An option gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) on or before a certain date.
Compensation Programs
- The purpose of initiating compensation programs in the context of risk management is to offer incentives to employees who take on specific risks or achieve certain performance targets.
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