Derivatives

Derivatives are contracts rather than assets. The value placed on derivatives is based on what happens to the price of underlying assets in the future.

Two types of derivatives are futures and options. The owners of a futures contract are obligated to sell or buy the underlying asset, whereas the options contract gives owners the right to sell or buy assets at a set price and by a specific date.

For example, the ABC Corporation purchases a stock option of EFG Gas at $40 and expects the value of EFG Gas to increase. If the price of stock increases, so will the price of the stock option because it is derived on the increase of the stock price.

How can derivatives be used in risk management? If you are an international corporation, what types of derivatives would you use to cover transactions?