ABSTRACT

This chapter focuses on financial risk management applications. Managers of all types of entities are confronted with many opportunities to create value for shareholders using financial risk management. The major concern is to determine when to use financial risk management to mitigate the risk arising from the changes in interest rates, exchange rates and commodity prices. One way to reduce risk is through diversification. The concept of negative correlation is central to hedging and risk management. The application of foreign currency futures to currency hedging is an effective method for mitigating financial risk. The issue is to mitigate financial risk due to currency and interest fluctuations. Hedging of foreign currency and interest is a common approach for reducing risk. Basically, foreign currency hedging strategies may be achieved by taking either or a combination of two approaches, namely the internal approach or/and the external approach of hedging foreign trade risks.