(ii) Exercise Price.
(iii) Option life.
(iv) Risk free rate.
(v) Stock price variance, that is, riskiness of stock.- Briefly describe the following types of derivative securities:
(i) Futures and forward contracts.
(ii) Swaps.
(iii) Structured notes.
(iv) Inverse floaters.- Define the following terms:
- Pure risks.
- Speculative risks.
- Demand risks.
- Input risks.
- Financial risks.
- Properly risks
- Personnel risks
- Environmental risks.
- Liability risks.
- Insurable risks.
- Self-insurance.
Should a firm insure itself against all of the insurable risks it faces? Explain.- What is a futures contract?
v Explain how a company can use the futures market to hedge against rising
interest rates.
v What is a swap? Describe the mechanics of a fixed rate to floating rate
swap.
v Explain how a company can use the futures market to hedge against rising
raw materials prices.
v How should derivatives be used in risk management? What problems can
occur?Read, discuss and answer the questions that follow:
Case Study 1: Tropical Sweets Inc.
Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a
mid-sized California company that specializes in crating exotic candies from tropical
fruits such a mangoes, papayas, and dates. The firm’s CEO, George Yamaguchi, recently