M25_MISH1438_06_IM_C25

M25_MISH1438_06_IM_C25 - Chapter 25 Hedging with Financial...

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Chapter 25 Hedging with Financial Derivatives Hedging Forward Markets Interest-Rate Forward Contracts The Practicing Manager: Hedging Interest-Rate Risk with Forward Contracts Pros and Cons of Forward Contracts Financial Futures Markets Financial Futures Contracts The Wall Street Journal: Following the News : Financial Futures The Practicing Manager Hedging with Financial Futures Organization of Trading in Financial Futures Markets Globalization of Financial Futures Markets Explaining the Success of Futures Markets Mini-Case Box: The Hunt Brothers and the Silver Crash The Practicing Manager: Hedging Foreign Exchange Risk with Forward and Futures Contracts Hedging Foreign Exchange Risk with Forward Contracts Hedging Foreign Exchange Risk with Futures Contracts Stock Index Futures Stock Index Futures Contracts Mini-Case Box: Program Trading and Portfolio Insurance: Were They to Blame for the Stock Market Crash of 1987? The Wall Street Journal: Following the News : Stock Index Futures The Practicing Manager: Hedging with Stock Index Futures Options Option Contracts The Wall Street Journal: Following the News : Futures Options Profits and Losses on Options and Futures Contracts Factors Affecting the Prices of Option Premiums Summary The Practicing Manager: Hedging with Futures Options Interest-Rate Swaps Interest-Rate Swap Contracts The Practicing Manager: Hedging with Interest-Rate Swaps Advantages of Interest-Rate Swaps Disadvantages of Interest-Rate Swaps Financial Intermediaries in Interest-Rate Swaps
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146 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition Credit Derivatives Credit Options Credit Swaps Credit-Linked Notes Case : Are Financial Derivatives a Worldwide Time Bomb? Conflicts of Interest Box: The Orange County Bankruptcy Overview and Teaching Tips The treatment of financial derivatives markets (forwards, futures, options and swaps) in this book differs markedly from that in other financial markets and institutions books. Financial derivatives are approached from the perspective of managers of financial institutions and this is why this material is placed in the financial institutions part of the book. Rather than go into a lot of facts about these different markets, this and the next chapter, which covers financial derivatives, focus on how the markets work and how they can be used to hedge the risk faced by financial institutions. This approach makes more sense to students who now clearly see why studying these markets and their operation is relevant. One problem that I have encountered in teaching students about financial derivatives is many do not find the financial derivative contracts to be particularly intuitive. In order to get them to understand how these contracts work, I find that it helps to outline the basic principle of hedging: hedging risk involves engaging in a financial transaction that offsets a long position with a short position, or offsets a short position with a long position. The chapter then uses this principle over and over again to motivate how different types of
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