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4 August, 04:06

Although derivatives can be used as speculative instruments, businesses most often use them to Group of answer choices

hedge risks.

appease stockholders.

enhance their balance sheets.

offset debt.

attract customers.

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  1. 4 August, 06:23
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    Hedge Risks

    Explanation:

    Derivatives refer to securities whose value is derived on the basis of the value of the underlying assets. For example, commodity derivatives, financial derivatives, futures, options etc.

    Hedging refers to a mechanism by which a probable future loss can be avoided or reduced.

    Forward contracts are derivatives wherein a party agrees to buy or sell an asset at a future date at a price fixed today.

    For example, an exporter in London will receive export amount in 6 months time. After 6 months, the sterling pound (domestic currency) might appreciate which would result into a loss to exporter upon conversion. Thus, to reduce his loss, he may enter into a forward contract whereby he agrees to sell USD after 6 months at an exchange rate fixed as on today.

    This is the concept of hedging.
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