Problem:
You have examined various types of derivatives that firms can utilize for the purpose of transferring risk. In this question, you will need to evaluate different scenarios and explain which types of derivatives would be most appropriate.
Given the possible locations, corporate structures, and risk types outlined below, identify three scenarios and analyze the type of derivative product that best fits the situation.
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Location
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A developing Area-Example: Africa
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A developed Area- Example: Europe
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An area that is both developed and continues to develop- Example: Asia
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Corporate Structure
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A standalone firm
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A major Operating subsidiary
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A medium-sized entrepreneurial endeavor
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Type of Risk Transferred
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Foreign Exchange Risk
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Interest Rate risk
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Operational delivery between countries
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As an example, you might want to analyze a standalone (corporate structure) manufacturing European (location) company that exports to the US and wants to hedge foreign exchange (FOREX) risk (type of risk). What type of derivative product would best fit this scenario? Why? Identify three scenarios similar to the above example and provide a detailed response for each that recommends a derivative and explains why that type might be the most appropriate.
Additional Information:
This question is from Finance and it is about derivative instruments which firms can utilize for the purpose of transferring risk. Derivatives like Forward contracts, Futures contracts, Options contracts, and so forth have been covered in the solution.