Objectives

After reading this chapter, students should be able to:

1. Identify several good reasons for companies to manage risk.

2.  Define the term “natural hedge” and give some examples.

3.  List three reasons why the derivatives markets have grown more rapidly than any other major market in recent years.

4.  Explain what an option is, identify some factors that affect the value of a call option, and calculate the exercise value and premium of an option.

5.  Explain the term risk-less hedge and then go through an example to create one.

6.  Use the Black-Scholes Option Pricing Model to calculate the value of a call option.

7. Distinguish between forward and futures contracts and define the following terms:  swaps, structured notes, and inverse floaters.

Specific Topics

• Managing Risk

• Natural Hedge

• Types of Derivatives

  • Options

    • Strike/Exercise Price

    • Call option

    • Put option

    • Long-Term Equity Anticipation Securities (LEAPS)

    • Exercise Value

    • Risk-less Hedge

    • Black-Scholes Option Pricing Model

  • Forward Contract

  • Futures Contract

  • Swap

  • Structured Notes

  • Inverse Floaters

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