2002 | OriginalPaper | Chapter
Introduction
Author : Hans-Peter Deutsch
Published in: Derivatives and Internal Models
Publisher: Palgrave Macmillan UK
Included in: Professional Book Archive
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The explosive development of derivative financial instruments continues to provide new possibilities and increasing flexibility to manage finance and risk in a way specifically tailored to the needs of individual investors or firms. This holds in particular for banks and financial services companies who deal primarily with financial products, but is also becoming increasingly important in other sectors as well. Active financial and risk management in corporate treasury can make a significant contribution to the stability and profitability of a company. For example, the terms (price, interest rate, etc.) of transactions to be concluded at a future date can be fixed today, if desired even giving the company the option of declining to go ahead with the transaction later on. These types of transactions obviously have some very attractive uses such as arranging a long-term fixed-rate credit agreement at a specified interest rate a year in advance of the actual transaction with the option to forgo the agreement if the anticipated need for money proves to have been unwarranted (this scenario is realized using what is known as a “payer swaption”) or providing a safeguard against fluctuations in a foreign currency exchange rate by establishing a minimum rate of exchange today for changing foreign currency into euros at a future date (using a foreign currency option).