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1、CHAPTER25DerivativesandHedgingRiskManagingriskisoneofthemostimportanttaskscon-derivativeswerepracticallyunheardofin2000,butthefrontingcorporatemanagement,andfinancialmarketsnotionalvalueoftheseinstrumentshadgrownto$12.4arealwayswillingtointroducenewproductstom
2、eetatrillionbythemiddleof2005.Ofcourse,themarketforneed,eitherrealorperceived.Considercreditderiva-currencyandinterestrateswaps,whichallowsforthetives,alsoknownascreditdefaultswaps.Acreditderiv-exchangeofcurrenciesorinterestpayments,hadgrownativeisanoptionlik
3、einstrumentthatallowsthesellerofevenlarger,withanotionalvalueofover$200trillion.Inthederivativetoputanunderlyingbondtothepurchaserthischapter,weexploreavarietyofderivativecontractsifacreditevent,suchasbankruptcy,occurs.Creditthatallowacompany’smanagementtocon
4、trolrisk.25.1Derivatives,Hedging,andRiskThenamederivativesisself-explanatory.AderivativeisaÞnancialinstrumentwhosepay-offsandvaluesarederivedfrom,ordependon,somethingelse.Often,wespeakofthethingthatthederivativedependsonastheprimitiveortheunderlying.Forexampl
5、e,inChapter22westudiedhowoptionswork.Anoptionisaderivative.Thevalueofacalloptiondependsonthevalueoftheunderlyingstockonwhichitiswritten.Actually,calloptionsarequitecomplicatedexamplesofderivatives.Thevastmajorityofderivativesaresimplerthancalloptions.Mostderi
6、vativesareforwardorfuturesagreementsorwhatarecalledswaps,andwewillstudyeachoftheseinsomedetail.WhydoÞrmsusederivatives?TheansweristhatderivativesaretoolsforchangingtheÞrmÕsriskexposure.SomeoneoncesaidthatderivativesaretoÞnancewhatscalpelsaretosurgery.Byusingd
7、erivatives,theÞrmcancutawayunwantedportionsofriskexposureandeventransformtheexposuresintoquitedifferentforms.AcentralpointinÞnanceisthatriskisundesirable.Inourchaptersaboutriskandreturn,wepointedoutthatindividualswouldchooseriskysecuritiesonlyiftheexpectedret
8、urncompensatedfortherisk.Simi-larly,aÞrmwillacceptaprojectwithhighriskonlyifthereturnontheprojectcompensatesforthisrisk.Notsurprisingly,then,Þrmsareusuallylookingforwaystoreducetheirrisk.
