Question

In: Finance

How can non-financial firms use financial derivative to enhance shareholders value. How?

How can non-financial firms use financial derivative to enhance shareholders value. How?

Solutions

Expert Solution

You have seen how financial companies use derivatives. You have also seen how non-financial firms use derivatives to manage risk, concerning the prices they receive for the goods and services they sell, or the prices they pay for inputs. For example, you saw how to use commodity futures and forward contracts.

Benefits of financial derivative to shareholders

Risk Management
This could be the most important purpose of the derivatives market. Risk management is the process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to equal the former. This process can fall into the categories of hedging and speculation.
Hedging has traditionally been defined as a strategy for reducing the risk in holding a market position while speculation referred to taking a position in the way the markets will move. Today, hedging and speculation strategies, along with derivatives, are useful tools or techniques that enable companies to more effectively manage risk.


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