DERIVATIVES

Jun 21st, 2015
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In finance, a derivative is a financial instrument (or, more simply, an agreement between two parties) that has a value, based on the expected future price movements of the asset to which it is linked—called the underlying asset—[1] such as a share or a currency.

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What is a corporation?A distinct permanent legal entity. A corporations owners are called shareholders or stockholders. The share holders do not directly own the businesss real assets (factories, oil wells, stores etc. ) they have an indirect ownership via financial assetsthe shares of the corporationShareholders cannot be legally responsible for the corporations debts. Goal: maximum value vs. profits:Short falls of profits: short term focus. Which years do we maximize?Save money this year but cutting money on training of staff. This is not as effective. Profit can be ambiguous due to GAAP (generally accepted accounting principals. )Goals of the corporation:Profit maximization?This goal ignores:Timing of returnsWhich years profits?Profits are ambiguous: GAAPRiskHow certain are the profitsFinancial Management decisions:Investment decisionWhat assets should our firm invest in?Financing decision:How should we raise funds?How should the firm raise the money that it needs for its investments and operations?Capital structure: the mix of long term debt and equity financing(capital is funds from long term debts or equity financing)a corporation is its own legal entity separate from its owners. A sole proprietorship and partnership are with the owners. Why are most large organizations public corporations?gives access to potential investors and people are willing to take risk because of limited liability.Opportunity cost of capital:The cost of capit

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