The motivation for this module is easily established by a quick flick through
the annual report of any modern day corporation.
For example, consider this excerpt from Kellogg's 2014 Annual Report, where
the company clearly identifies different sources of risk to its cash flows and
then identifies the different instruments that it uses to manage those risks.
The structure of this module will be as follows.
Firstly, we'll consider how corporations might manage risk
by locking in prices using forward contracts for future execution, but
highlight some of the dangers such contracts expose counterparties to,
and how the development of futures markets addresses many of those shortcomings.
Our focus will then shift toward the style of contract and that enables a hedger to
reduce downside risk while keeping the upside of beneficial price movements alive
with the discussion of the role of options contracts.