Many companies expose themselves to various financial risks, primarily due to their business models (the way they conduct business).
Instructions
(a) Discuss the preceding statement by identifying the various financial risks and giving real life examples. In creating shareholder value, why is it important for a company to manage risk?
(b) Explain what a derivative is. What are the three key characteristics? Give some examples of derivatives.
(c) Explain what is meant by the act of hedging from an economic perspective. What is meant by the use of hedge accounting? When might a company opt for hedge accounting to report an economic hedge? When might a company decide not to use hedge accounting for an economic hedge?