Options and Swaps

You provided an education to all on futures and options contracts. Senior Management was impressed with your presentation, which detailed the differences between using futures contracts and options contracts to reduce risk. Senior Management has heard of a different type of derivative instrument called a swap and would like to know if the company would have any need to use this instrument in the future.

• Please discuss a swap and how it could be used to reduce risk.
• What general examples would you give to Senior Management to illustrate effective and ineffective hedging?
• Also what is meant by a swap rate? Provide published examples of swap rates.