Derivatives play a key role in managing financial risk from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
Derivatives are financial instruments whose value is derived from the value of some underlying asset or variable, such as a commodity price, interest rate, or stock price. These instruments have become increasingly popular in recent years due to their ability to help firms and individuals manage financial risk. One of the key ways in which derivatives are used to manage risk is through hedging. Hedging involves using derivatives to offset the risk of adverse price movements in an underlying asset. For example, a company that is concerned about rising interest rates may use interest rate swaps to lock in a fixed rate of interest on its debt, thereby protecting itself fr...
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