Hedging against market risk

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Hedging against market risk

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Abstract

The management of market risk is vital to the survival and success of any organization operating in any sector such as banks and other businesses. For effective management of risk, an organization may make use of derivatives. Derivatives are financial securities whose value is tied to the value of one or more assets called the underlying. These include equities, fixed income, currencies or commodities.

Summary
The futures of the forward type
Futures type future
Swaps
Options contracts
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[...] It may even represent an intangible medium as an index of consumer prices. The main contract trade options may be of the following types: - A ‘call' gives the buyer the right to purchase a specified number of units at a specified price (called the exercise price or strike price) on or before a specified date (called maturity or strike date); - A ‘put' gives the buyer the right to sell a specified number of units of media assets at a specified price on or before a specified date. [...]

[...] Thus if there is an increase in price and the contract holder has acquired a positive value, this gain will not be collected before the end of the Forward contract, though in the case of a futures contract, it will be collected at the end of the day. c. Swaps Since the swaps evolved only in the 1980's, they are considered the most recent financial innovation. However, a swap is nothing more than a portfolio associated with Forward-type contracts. A swap agreement requires the two contracting parties to exchange (swapping) the cash flow on specified dates. [...]

[...] The amount depends on the volatility of the contract price and the risk it poses. It can vary between 1 and 10% depending on the nature of the medium. If the value of futures contracts increases, the gain (consisting of the product of the number of contracts by the difference between the new course and the course of the day) is credited to the buyer. Conversely, if the contract loses value, the amount of the loss is debited from the buyer's deposit and reaches a minimum level called the maintenance margin. [...]

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