This lesson examines the use of financial derivatives for hedging purposes, covering forwards, futures, swaps, and options. It also addresses the concept of insurability and the role of insurance in risk transfer, as featured in the LMU Munich Financial Risk Management course .
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Derivatives Fundamentals: The basics of derivative securities are covered: specifically forwards, futures, swaps, and options—how they work, how they are used for hedging and speculation, and how the pricing of these contracts works . Concepts and instruments such as derivatives, hedging, and insurance are discussed .
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Hedging Strategies: The consideration of how firms should hedge risk from a broad strategic perspective, focusing particularly on currency risk and, more specifically, transaction, translation, and economic exposure. It examines when it makes sense to hedge financially and what types of contracts to consider . The different ways of hedging exposure embedded in bonds are also discussed .
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Hedging Instruments in ALM: In asset-liability management, hedging is relevant through derivative instruments such as financial futures, options (including caps and floors), and interest rate swaps. Futures trading is characterised as a zero-sum game, with key issues including margin calls .
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Insurability and Insurance: Students learn to assess the insurability of certain risks and evaluate different risk management techniques in terms of pricing, relevance, and usage . The role of insurance in transferring risk is examined alongside the use of derivatives for hedging .