Financial Derivatives: A source of Risk mitigation Case Solution & Answer

Financial Derivatives: A source of Risk mitigation Case Solution

According to this situation, where the company exports goods, deals in FOREX and takes loans on interest, it cannot be said that only a single financial derivative will fit in all the situations. The company has to use Swaps (both currency and interest) and future contracts to minimize and transfer its risk towards other parties.

Rapidly Growing Region, capital Structure and most feasible instrument

Asia has been selected as a rapidly growing developed region, as majority of the countries in Asia have been developed such as China, Japan, Russia and etc.These countries are continuously growing and developing and contributing a lot towards the Asian economy. This is the reason that Asia is still growing and flourishing. (Honda, 2015)
Furthermore, Honda has been selected as the targeted company for the analysis. The company manufactures automobiles including cars, motorbikes and etc.Moreover, the company has a strong brand image, capital structure and a tremendous business model which allows it to compete successfully in the market as well as the globe.

he company has its own subsidiaries across the world and it also exports vehicles to those countries where its subsidiaries are not developed. The company belongs to Japan and it has been operating since a long time. However, Honda has a very strong brand equity and goodwill in Asia.

As far as the best financial derivative is concerned, the company has to use options as it will be the most feasible risk minimization tool because the company manufactures automobiles and works in a very volatile and fragile sector since the cost and prices of fuel and spare parts fluctuate on almost daily basis and the company has a huge production capacity particularly in Japan. Therefore, the company can mitigate the risk of price fluctuations by making contracts with its forwards and backward channels to ensure smooth buying and selling process without being hinder by prices. Moreover, the company can use options as these are the most feasible risk mitigating tools.

Conclusion

Finally, it can be said that financial derivatives are the most feasible tools to mitigate, transfer and minimize the risk of any company. However, in the analysis above, it can be seen that there are several tools which can be used by different companies as none of the tools can be used in all the situations and the requirement and the need of derivatives varies from business to business, capital structure and type of the business processes. Therefore, it can be concluded that risk mitigation is quite important for all the companies asevery company has its own risk either credit or other. In a nutshell, it can be said that financial derivatives which have been discussed across different companies and regions will be considered as the most appropriate tools to minimize the risk in the analysis above………..

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