Derivatives can be used to hedge against risk from "summary" of How Finance Works by Mihir Desai
Derivatives can play a crucial role in managing risk. Companies face various risks in their day-to-day operations, ranging from fluctuations in interest rates to changes in commodity prices. These risks can have a significant impact on a company's bottom line, making risk management an essential part of financial decision-making. One way companies can use derivatives to manage risk is through hedging. Hedging involves using derivatives to offset the potential losses that may arise from adverse movements in prices or rates. For example, a company that is exposed to the risk of rising interest rates may choose to enter into an interest rate swap to protect itself against such a scenario. By using derivatives to hedge against risk, c...
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