Complex Financial Instruments. The complex financial instruments which have received significant attention in recent years and which should continue in importance into the future are derivative financial instruments.

Required

A. Define ‘derivative financial instruments’.

B. Discuss how the type of risks entailed in the use of derivative financial instruments differ from the risks of a mortgage-backed bond.

C. What kinds of problems could arise if derivatives are used extensively by the treasury department of a company, yet their use has not been authorized by senior management and the board of directors?