Figure 231

Price Levels in England (1850 = 100)

Price Levels in England (1850 = 100)

Source: Charles W. Smithson, Managing Financial Risk: A Guide to Derivative Products, Financial Engineering, and Value Maximization, 3rd ed. (New York: The McGraw-Hill Companies, 1998).

The International Financial Risk Institute (risk.ifci.ch) promotes education on . risk management.

derivative security

A financial asset that represents a claim to another financial asset.

Corporate risk management often involves the buying and selling of derivative securities. A derivative security is a financial asset that represents a claim to another financial asset. For example, a stock option gives the owner the right to buy or sell stock, a financial asset, so stock options are derivative securities.

Financial engineering frequently involves creating new derivative securities, or else combining existing derivatives to accomplish specific hedging goals. In a world where prices were very stable and changed only slowly, there would be very little demand for financial engineering. As this is being written, however, financial engineering is very much a growth industry. As we illustrate next, the reason is that the financial world has become more risky.1

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