Derivatives

As requested here are some notes on Derivatives. Introduction to Options as well as an introduction to other derivatives such as futures and swaps.  For those of you who still have questions about derivatives, a glossary of risk management terms is available at the Treasury Management Association of Canada's site.  It is fairly complete and quite good.  For further details here is an excellent link that explains interest rate swaps as well as another source for info on interest rate swaps.   There is also a useful site off of Yahoo's finance site.   It has a good Frequently Asked Questions section.  Using derivatives for risk management (2/2/98) is a very important field that generally does not get the coverage it warrants in an undergraduate course. 

A great site on the Black-Scholes option pricing formula is Kevin Rubash's page at the Bradley University.  It is a great site.   I highly recommend an email to Dr. Rubash to let him know.

A working paper looking at hedging came across my desk this AM (2/17/99).  It is by Allayannis and Weston from the University of Virginia (we shouldn't hold that against them!).  The complete article is available from the SSRN: http://papers.ssrn.com/paper.taf?abstract_id=138498

The paper examines the use of foreign currency derivative (FCDs) by large US nonfinancial firms.  It finds "a positive relationship between firm value and the use of FCDs. The hedging premium is statistically and economically significant mostly after 1993 and is on average 5.7% of firm value. This result is robust to a) controls for size, profitability, leverage, growth opportunities, ability to access financial markets, industrial and geographical diversification, credit quality, industry classification (4-digit SIC), year-dummies and firm fixed-effects; b) the use of a weight-adjusted industry Tobin's Q and other measures of value,such as the market to book and the market to sales ratios; and,c) alternative estimation techniques that handle the potential impact of outliers."   (hint: in English it says that hedging increases firm value!)