This chapter is devoted to the study of risk management, which essentially involves hedging against risks. Financial transactions undertaken solely to reduce risk do not add value in perfect markets; still almost all firms use financial contracts to manage risk. Hedging risk is a part of a financial manager’s job as hedging reduces the probability of financial distress. It also makes it easier to judge the performance of the operating manager, and allows the manager to focus on events within his/her control. This chapter describes the principles of hedging and introduces some of the derivative instruments that are commonly used by financial managers to hedge risk.
