CHAPTER 18 Derivatives and Risk Management Derivative securities Fundamentals of risk management Using derivatives Are stockholders concerned about whether or not a firm reduces the volatility of its cash flows? Not necessarily. If cash flow volatility is due to systematic risk, it can be eliminated by diversifying investors’ portfolios. | CHAPTER 18 QI Derivatives and Risk Management Derivative securities Fundamentals of risk management Using derivatives 18-1 Are stockholders concerned about whether or not a firm reduces the volatility of its cash flows Not necessarily. If cash flow volatility is due to systematic risk it can be eliminated by diversifying investors portfolios. 18-2 Reasons that corporations engage in risk management Increase their use of debt. Maintain their optimal capital budget. Avoid financial distress costs. Utilize their comparative advantages in hedging compared to investors. Reduce the risks and costs of borrowing. Reduce the higher taxes that result from fluctuating earnings. Initiate compensation programs to reward managers for achieving stable earnings. .
