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Hedging against market risk

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  1. Summary
  2. The futures of the forward type
  3. Futures type future
  4. Swaps
  5. Options contracts
  6. Conclusion

The management of market risk is vital to the survival and success of any organization operating in any sector such as banks and other businesses. For effective management of risk, an organization may make use of derivatives. Derivatives are financial securities whose value is tied to the value of one or more assets called the underlying. These include equities, fixed income, currencies or commodities.

[...] It may even represent an intangible medium as an index of consumer prices. The main contract trade options may be of the following types: - A ?call' gives the buyer the right to purchase a specified number of units at a specified price (called the exercise price or strike price) on or before a specified date (called maturity or strike date); - A ?put' gives the buyer the right to sell a specified number of units of media assets at a specified price on or before a specified date. [...]

[...] Thus if there is an increase in price and the contract holder has acquired a positive value, this gain will not be collected before the end of the Forward contract, though in the case of a futures contract, it will be collected at the end of the day. c. Swaps Since the swaps evolved only in the 1980's, they are considered the most recent financial innovation. However, a swap is nothing more than a portfolio associated with Forward-type contracts. A swap agreement requires the two contracting parties to exchange (swapping) the cash flow on specified dates. [...]

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