Introduction to Corporate Finance

Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition

VIII. Topics in Corporate

Finance

23. Risk Management: An
    Introduction to Financial
    Engineering

© The McGraw−Hill^825

Companies, 2002

CHAPTER 23 Risk Management: An Introduction to Financial Engineering 799

FIGURE 23.13

Risk profile

A. The unhedged risk profile

P

V

Hedged

profile

B. The hedged risk profile

P

V

Put option

payoff

Original

profile

The hedged profile is created by purchasing a put option,

thereby eliminating the downside risk.

Hedging with Options

TABLE 23.2

Sample Wall Street

JournalFutures Option

Price Quotations

Source: Reprinted by permission of The Wall Street Journal,© 2001 Dow Jones &

Company, Inc., September 5, 2001. All Rights Reserved Worldwide.