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fm23 1 - Chapter 23 Derivatives and Risk Management ANSWERS...

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Answers and Solutions: 23 - 2 Chapter 23 Derivatives and Risk Management ANSWERS TO END-OF-CHAPTER QUESTIONS 23-1 a. A derivative is an indirect claim security that derives its value, in whole or in part, by the market price (or interest rate) of some other security (or market). Derivatives include options, interest rate futures, exchange rate futures, commodity futures, and swaps. b. Corporate risk management relates to the management of unpredictable events that have adverse consequences for the firm. This effort involves reducing the consequences of risk to the point where there would be no significant adverse impact on the firm’s financial position. c. Financial futures provide for the purchase or sale of a financial asset at some time in the future, but at a price established today. Financial futures exist for Treasury bills, Treasury notes and bonds, CDs, Eurodollar deposits, foreign currencies, and stock indexes. While physical delivery of the underlying asset is virtually never taken, under forward contracts goods are actually delivered.
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