Concept
-
In this set of notes, we conclude the first module by focusing on some of the main financial instruments in relation to the risk they mitigate and are exposed to.Understanding investment instruments in relation to the risk they mitigate is essential for any market participant. A company can spend massive resources assessing their risk exposure, but ultimately, if they do not use the correct instrument to manage that risk, they will still be exposed to great potential loss.The alternative is also true. One does not do themselves any favors if they employ an investment instrument without knowing what risk that instrument exposes them to. Think of investing in a company’s stock without realizing that its share price can fluctuate with the profit performance of that company. For this reason, we unpack each instrument in its relation to risk a little further below.