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Derivatives and Risk Management
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Inflation Derivative
Inflation derivatives are used to mitigate the risk associated with inflation rates affecting the real value of assets and cash flows.
Collar
A collar combines a cap and a floor to hedge against fluctuations in prices, often used to limit the range of possible outcomes in an investment.
Exotic Option
Exotic options, with features more complex than standard options, are used for bespoke risk management strategies tailored to unique market views or circumstances.
Cap and Floor
Caps protect against rising interest rates while floors protect against falling rates, commonly used in floating-rate loan agreements to govern rate fluctuations.
Credit Default Swap
A credit default swap is a financial derivative that enables an investor to 'swap' their credit risk with another party.
Equity Derivative
Equity derivatives are used to manage risk associated with price movements in stock markets, allowing investors to hedge or speculate on equity prices.
Binary Option
Binary options provide a fixed payoff depending on whether a certain condition is met at expiration, which can hedge against specific market moves.
Asset-backed Security
By pooling assets into a tradable security, risk is spread among investors, mitigating individual exposure to defaults or other underlying asset risks.
Interest Rate Derivative
Interest rate derivatives are used to hedge against the risk of interest rate fluctuations that could affect the cost of borrowing or the value of investments.
Weather Derivative
Weather derivatives are used to hedge against financial risks associated with variations in weather, such as unexpected temperature changes affecting profits.
Forward Contract
A forward contract is used for locking in the price of an asset, thus hedging against price volatility.
Barrier Option
Barrier options are utilized to manage risks by activating or deactivating based on the asset price reaching a certain level, providing cost-effective hedging.
Foreign Exchange Derivative
FX derivatives are used to hedge against unfavorable currency exchange rate fluctuations that can impact international financial transactions.
Structured Product
Structured products can be custom-tailored to fit specific risk-return objectives, helping investors to achieve hedging alongside return enhancement.
Option Contract
Options give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price, which can limit downside risk.
Swap Contract
Swaps are used to exchange cash flows or financial instruments, allowing parties to manage interest rate risk or currency exposure.
Commodity Derivative
Commodity derivatives are used by producers and consumers to hedge against the risk of commodity price changes that can affect their profits and costs.
Volatility Derivative
Volatility derivatives allow investors to hedge against or speculate on future volatility levels of an underlying asset without directly exposing themselves to that asset.
Futures Contract
Similar to a forward, futures contracts mitigate risks of price fluctuations by setting a future price, but are standardized and traded on exchanges.
Mortgage-backed Security
Mortgage-backed securities spread the risk of mortgage defaults across many investors, hedging individual risk exposures to real estate markets.
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