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Derivatives and Risk Management by Sundaram Janakiramanan

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1

Introduction

LEARNING OBJECTIVES

After completing this chapter, you will be able to answer the following questions:

  • What are derivatives and what are the main uses of derivatives?

  • What are forwards, futures, options, and swaps?

  • What are risks and how do they affect businesses?

  • What are commodity price risks, interest rate risks, and currency risks?

  • Why is it important to manage risks?

  • What is meant by hedging?

  • What are the approaches to risk management?

BOX 1.1 Caution While Using Derivatives

While dealing with derivatives, a number of points are to be kept in mind. First, a derivative contract is based on a zero-sum game, which means that for every person who makes money from derivatives, there must be one loser. Second, many derivative ...

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