Financial Management Instructor‘s manual ch18.pdf

Chapter 18 Derivatives and Risk Management Learning Objectives After reading this chapter, students should be able to:  Identify the circumstances in which it makes sense for companies to manage risk.  Describe the various types of derivatives and explain how they can be used to manage risk.  Value options using the Binomial and Black-Scholes Option Pricing Models.  Discuss the various elements of risk management and the different processes that firms use to manage risks. Chapter 18: Derivatives and Risk Management Learning Objectives 483 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Lecture Suggestions This chapter provides information on derivatives and how they are used in risk management. We begin by identifying the reasons why risk should be managed. Then, we give a brief background on derivatives. We illustrate a riskless hedge and present the Binomial Option Pricing Model. Next, we present the Black- Scholes Option Pricing Model to discuss the various factors that affect a call option’s value. We specifically discuss forward and futures contracts, as well as other types of derivatives such as swaps and structured notes. In addition, we explain how derivatives are used to reduce risk through hedging, particularly with financial and commodity futures. Finally, we discuss risk management, define different types of risks, and then provide an approach to risk management that firms can follow. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 1