Chap 24 Flashcards
Hedging
Redicing a firm’s exposure to price or rate exposure. Also immunization
Derivative Security
A financial asset that represents a clame to another financial asset
Risk Profile
A plot showing how the value of the firm is affected by changes in price or rate
Transaction Exposure
Short run financial risk arising from the need to buy or sell at uncertain price or rate in the near future
Economic Exposure
Long term financial risk arising from permanent changes in prices or other economic fundamentals
Forward Contracts
A lagaly binding agreement between 2 parties calling for the sell of an asset or product in the future at a price agreed upon today
Payoff profile
A plot showing the gains and losses that will occure on a contract a result of unexpected price changes
Futures Contract
A forward contract with the feature that gains and losses are realized each day rather than only on the settlement date
Cross-Hedging
Hedging an asset with a contract on a closely related but not identical asset
Basis Risk (cross hedging)
A risk that futures prices will not move directly with cash prices hedged
Swap Contract
Agreement by 2 parties to exchange or swap specified cash flow at specified intervals in the future
Credit Default Swap
A contract that pays off when a credit event occurs (default by a particular company). In this case the buyer of the CDS has the right to sell corporate bond of the reference entity to the seller of the CDS at face value
