Use of Derivatives in Risk Management Term Paper

Use of Derivatives in Risk Management - Term Paper Example Following are the major sorts of instruments applied by organizations to manage the financial risks associated with business activity. Futures and Options In this type of instrument, one individual or business signs a contract with another one to purchase the commodity on some future date with an agreed-upon price. However, in futures both of the parties have to go through with the contract while in options both of the parties reserve the right to withdraw the contract upon paying in monetary terms. Agreements: This instrument is localized in nature, and governments do not interfere with its transactions. Nevertheless, the purpose of these agreements is the same as that of futures and options, which is to hedge against fluctuations in the market price of the commodity or an industrial product. It is also important to note that these kinds of agreements are more common in economically distressed nations. But, recently they are intensively deployed in order to ensure a supply of raw material in US, which is necessary because of the prevailing recession in the local market. So, it is safe to assume that businesses are preparing themselves for increasing adversities of the future by contracting with their suppliers on a long term basis, which also enables them to attain economies of scale as a result, driving their financial and operational costs down that allows them to lower their prices in order to increase their market share. Nevertheless, it is fascinating to acknowledge that various businesses are paying close attention towards managing financial risk through using statistical models in order to assess the current level of risk, which can disrupt the expected pattern of their cash flows (Benson & Oliver, 2004). However, they often lack the proper translation of this analysis into practical plans, so in this way they cannot benefit from the concept of derivatives effectively most of the times. On the other hand, manufacturing sector of Europe is using derivatives more extensively than American ones (SpricIc, 2007). The prime reason for this trend is prevailing and growing uncertainty of the European market as compared to that of America. Along with this, managers who deploy derivatives in order to evaluate the degree of risk in financial terms are viewed as trustworthy by stockholders because they consider it as the proper and desirable means of minimizing financial threats (Koonce, Lipe, & McAnally, 2008). However, managers are found to falter by not basing their business decisions on the results of derivative analysis, therefore portraying the image of rational business decision making when in reality it is not the case. At the same time, derivatives are not rated as an effective mean for minimizing the possibility of default (Yi, Lin, & Chen, 2008). Therefore, derivatives can only be utilized as the mean of predicting future financial position of a particular firm. However, it is important to note that firms that base their decisions on derivative analysis often outperform those that do not consider derivatives as an ideal method for predicting financial future (Lin, Pantzalis, & Park, 2009). Another advantage of successful risk management is contentment of stockholders (Berk, Peterlin, & Cok, 2009). Through effective management, risk managers can handle them and are

Consumer Behavior Assignment Example | Topics and Well Written Essays - 2500 words - 1

Consumer Behavior - Assignment Example Many individuals have convictions that the theory not only provides the platform for individual performance but also for the success of the businesses. The theory illuminates that people or human needs can be faceted using five sets. The existence of these needs is in a particular order of which if one is fulfilled, the desire to fulfill the next one crop up. The first need encompasses the basic needs that aid in the functioning of the body. The examples of such need are activities such as eating, drinking et cetera. At times, the sexual needs are usually category. The next need entails the deep inherent desire to be secure and safe. Security in this context refers to having the knowledge that those basic are to be fulfilled in future. The third needs involve the need for love, company or friendship. Humans tend to forget that once they had forgotten that they were hungry in the past, they cared little about love. The immediate subsequent stage consists of the social needs (Kremer & Hammond, 2014). The social needs may involve the need for an individual to belong in the highest status, social recognition, and the need for respect. In the last set of the needs is the self-actualization need. Maslow’s initial work did not entail the used of either triangle or pyramid to represents the human motivational needs. However, the contemporary Maslow’s needs have the illustration of the needs in a pyramid format where the preferential order of the needs begins at the pyramid’s based to the top. In the management approach the needs were as follows: the physiological needs, safety needs, social needs, esteem needs, and self actualization needs. Managers often use the model to identify the employees’ needs with the aim of aiding them to fulfill the needs. These needs are so essential in the life of individuals that if not met, makes it difficult to move up the pyramid. In the physiological needs, the basic needs hotels can offer are in