1. Introduction

2. Direction of Study Investments Derivative Securities Options, Futures, Swaps Corporate Financial Strategies Corporate Challenges Derivative Security Usages Effective Management

3. Investments Derivative Securities Financial Contracts that “derive” their value from some underlying asset price. Options – Right to Buy/Sell Futures – Commitment to Buy/Sell Swaps – To switch out of one financial contract for another (usually multiple times across a horizon)

4. Corporate Financial Strategies Corporate Challenges Product Price Uncertainties Selling Price, Cost of Materials Financing Uncertainties Balance Sheet Funding Transaction Exposure Derivative Security Strategies Effective Management: Hedging vs. Speculation

5. Method of Study Toolbox: Options, Futures, Swaps Payoffs, Prices and Strategies In-class problems, At-home review materials Implementation Trading Online Hedge, Speculate Cases

6. Requirements Group Work (4 person groups) Trading Online Cases Individual Work 2 exams across quarter, no Final Exam MBAs: Paper on Derivatives (Plan an Appointment)

7. Why Risk Management? Higher Risk due to: Inflation/DisInflation Volatility of FX Rates Volatility of Interest Rates

11. Impact on Firms Transaction Exposure: Commodity Price Risk Foreign Exchange Risk Financing Exposure Interest Rate Risk

12. Market Response Commodity Prices Futures, Options, Swaps, Exotics Foreign Exchange Futures, Options, Swaps, Exotics Interest Rates Futures, Options (Caps & Floors), Swaps, Exotic Debt

13. Reasons exist for active financial risk management SMOOTH EARNINGS!!! Match Supply of Internally-generated funds with Demand for funds for Capital Expenditures Match Employee’s incentives with Investors Match Information Advantage with Transaction Ability & Cost of Transaction