It is believed that once the gitp completed the

Info icon This preview shows pages 4–7. Sign up to view the full content.

View Full Document Right Arrow Icon
efforts to grow business volume and visitation. It is believed that once the GITP completed, the position of the Resort World Genting will be elevated as the destination of choice in the region, contributing to Malaysia’s economic development and tourism industry (Genting Malaysia Berhad Annual Report, 2015). 4
Image of page 4

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
UBFF3063 Financial Derivatives (Jan 2017) (2) Explain the rationale of hedging using financial derivatives. Derivative is a financial instrument which derives its value from the value of some other underlying financial instrument. They include options, swaps, futures and forward contracts. The underlying assets include commodities, stock, stock indices, bonds and currencies. The purpose of derivative is used for hedging in order to manage the financial risk. Derivatives used as a hedge allow the risks associated with the underlying asset's price to be transferred between the parties who involved in the contract. Hedging is a risk management strategy used in limiting or offsetting the probability of loss from the fluctuations in the prices of underlying assets . In effect, hedging is a transfer of risk without buying insurance policies. Hedging taking equal and opposite positions in two different markets which are cash and futures markets. Hedging is used also in protecting one's capital against effects of inflation through investing in high-yield financial instruments, real estate, or precious metals. Hedging is practised in day to day life. Hedging refers to a method of reducing the risk of loss caused by price fluctuation. Portfolio managers and corporations use hedging techniques to reduce their exposure to various risks. Companies used hedge to manage their price discovery and risk management. Companies can transfer for a price, any undesired risk to other parties who want to assume that risk to minimize the price risk by using derivatives. As managers, they hedge because they are undiversified. Small shareholders can diversify their risks, but managers cannot. They invest their income from labor as well as their personal assets in the firm. Therefore, while owners (principals) are diversified, managers (agents) are not. Since managers are risk averse and they control the company directly, so they hedge. Beside, companies can hedge interest-rate risks in various ways. Consider a company that expects to sell a division in one year and at that time to receive a cash wind-fall that it wants to "park" in a good risk-free investment or a company had an unexpected profit, if the company strongly believes that interest rates will drop between 5
Image of page 5
UBFF3063 Financial Derivatives (Jan 2017) now and then, it could take a long position on a treasury futures contract. The company is effectively locking in the future interest rate. We know that corporations hedge their risks through other financial contracts.
Image of page 6

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern