ABSTRACT
In this chapter we examine derivatives and insurance, financial contracts that companies can use to manage different types of risks. We begin with a general review of risk management techniques and then turn to a review of why and how derivatives and insurance are used, the similarities and differences between the two, and the types of risks that each class is designed to create, reduce, or transfer. Following this we consider speculation and arbitrage, two activities that are unique to derivatives. We conclude by analyzing the characteristics of derivatives and insurance; although the two share certain similarities, this section reveals in greater detail important differences between the two.
