Introduction to Corporate Finance

23: Introduction to Financial Risk Management

mini case

Basic International Group has been involved in

international trade for the past four years. Recently,

the CEO has come to realise that Basic needs

better risk management, and she asks you to

investigate ways to manage risk through hedging.

You remember that derivative securities, including

forwards, futures, options and swaps, are the

financial instruments commonly used for hedging

and risk management. However, to gain more insight

into risk management, you decide to answer the

following questions.

ASSIGNMENT

1 What are the types of risk factors that a company

faces?

2 If risk aversion cannot explain why companies

choose to hedge, then what are their motivations?

3 Explain how a company’s management can limit

risk exposure through using a forward contract.

What types of forward contracts are available?

4 What are the differences between forward and

futures contracts?

5 How do managers use futures contracts to limit

risk exposure?

6 How do managers use options to limit risk

exposure?

7 How do managers use swaps to limit risk

exposure?

RISK MANAGEMENT

ONLINE STUDY TOOLS

Visit http://login.cengagebrain.com and use

the access code that comes with this book for

12 months’ access to the resources and study

tools for this chapter. The CourseMate website

contains:

Smart concepts – step-by-step explanations of

concepts

» See a demonstration of the concept

of risk management, the functioning

of forward and futures contracts, and

an example of forward pricing and

arbitrage.

Smart solutions – step-by-step explanations of

problems

» See the solution to Problem 23-2

explained step by step.

Smart videos

» David Childress, Asset Liability

Manager, Ford Motor Co.

» Keith Woodward, Vice President of

Finance, General Mills

» John Graham, Duke University

» Betty Simkins, Oklahoma State

University

Interactive quizzes

Audio

Flashcards and more.