Financial Derivatives: A source of Risk mitigation Harvard Case Solution & Analysis

Financial Derivatives: A source of Risk mitigation Case Solution

Financial Derivatives

Financial derivatives are financial instruments used for hedging,however, the importance of financial derivatives can be seen from the title of the paper. These financial instruments are used globally to minimize, mitigate or transfers one’s risk towards another. Nonetheless, these parties may be individuals or companies. Moreover, financial derivatives are considered as a source of risk mitigation and normally used by banks, hedge funds, mutual funds, pension funds and insurance companies. These tools include five basic categories, which are classified in other sub categories. The basic categories of financial derivatives include Interest Rate Swaps, Currency Swaps, Forwards, futures and options. Moreover, these categories can be used under different circumstances and have different specification and purpose.

(Brimigham, 2011)

Use of financial derivatives under different locations

In this section, the usage of these tools will be defined in different areas, different companies and with different types of derivatives.

Developing location

In this section, Africa is taken as the developing region and in this region the corporate or capital structure of different companies varies from company to company however, it has been noted that these companies majorly consist of leverage i.e. the capital structure is highly levered of majority of the firms. Moreover,Sontrach has been chosen in this region to analyze the use of financial derivatives. As it has been discussed above that majority of companies in this region are highly levered and therefore, it can be said that the company is operating business containing higher amount of debt in its capital structure.(Sontrach, 2013)

Corporate Structure

Sontrach is a petroleum company having a tremendous business model and high margins as compared to its industry peers. The company has almost 20% in his net profit,while the capital structure is highly levered as the company has almost 60% of debt in capital composition.

Type of Risk can be transferred

As the facts and figures pertaining to the company have been discussed earlier and the company is highly levered,therefore, the best technique to transfer or mitigate its risk will be options. Regardless of the types i.e. call or put, the company can use both types of options as the company is extracting crude oil and can make contract to buy or sell the required resources from its vendors by using both types of options.

(Sophocles, 2010)

Developed Location, Corporate Structure and the Best Option

In this section, the United States of America has been selected as the developed region. Moreover, in this section the company which has been used for the analysis is Proctor and Gamble. The company belongs to USA and the company has a balanced corporate and capital structure. The company is a worldwide leading FMCG company and deals in different types of FMCG products. However, the company’s capital structure shows that the company has almost 50% of debt and 50% of equity in its total capital composition. The company takes loans from different DFIs and exports its goods to different countries. However, the company also has its own subsidiaries across the world. (Gamble, 2015)..................

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