1. What are the types of risk factors that a company faces?
2. If risk aversion cannot explain why firms choose to hedge, then what are the motivations?
3. Explain how a firm's management can limit risk exposure through using a forward contract. What types of forward contracts are available?
4. What are the differences between forwards and futures contracts?
5. How do managers use futures contracts to limit risk exposure?
6. How do managers use options to limit risk exposure?
7. How do managers use swaps to limit risk exposure?
Basic International Group Incorporated has been involved in international trade for the past 4 years. Recently the CEO has come to the realization that Basic needs better risk management and he asks you to investigate ways to manage risk through hedging. You remember that derivative securities, including forwards, futures, options, and swaps, are the financial instruments commonly used for hedging and risk management. However, to gain more insight into risk management you decide to answer the following questions.