Risk Management

Swaps combinations of forwards term you hear more

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Unformatted text preview: affiliate and can’t trade the stock freely, you are now an insider and have to disclose every trade you make. Tools to manage risk: Forwards (contract): enter arrangement with bank and negotiate all terms of arrangement with them (“hey, im receiving 6 million krona in December, what can you lock me in at to protect me if it depreciates) specifically negotiated on each term: time, settlement conditions, etc. Swaps (combinations of forwards): term you hear more today. It is a combination of two or more forward contracts. Swapping one type of risk for another risk that krona depreciates for no risk, but bank now has the risk and wants to find someone who is willing to take that risk. Between you and bank Specifically negotiated, tailoring contract to specific condition Futures: traded on exchanges, standardized as to price, quantity, and time it will settle. Between you and exchange (clearing house division) Usually with downpayment Will fully protect the price movement, options may or may not fully cover the risk. Options: Optional Buyer and seller Buyer: buys right not obligation to do transaction Alternate way to hedge that risk Cash/more liquid capital: Can have more cash to mitigate risk because if you look at stock portfolio, then it may be better to not have all 100% of money in stocks...
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This document was uploaded on 03/27/2014 for the course FINC 150 at Georgetown.

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