Finansial Ecomics and Financial Institutions - Risk Management with Swap Contracts

... Financial Economics and Financial Institutions Essay 1 Essay topic: Risk Management with Swap Contracts Matriculation Number: 0007927 Due Date: 16/12/2002 Word count: 2498 Table of content Introduction 3 Risk Management 4 Types of risk firms may face 4 Why do firms manage risk? 5 Hedging with Swaps 7 Summary 11 Bibliography 12 Introduction Today, financial risk not only can affect quarterly profits but may determine a firm's survival. Unpredictable movements in the interest rates, exchange rates and commodity prices present a risk that firms cannot ignore. In today's world, it is not enough to be the firm with the most advanced production technology, the cheapest labour supply and the best management. Price volatility can put even well run companies out of business. Changes in exchange rate can create competition that never previously existed. Similarly, changes in interest rate can put pressure on firm's costs. Rising interest rates increase the cost of borrowing and can lead directly to financial distress. The volatility of interest rates, exchange rates and commodity prices

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