As We Saw in the Chapter, Some Financial Instruments Are

question 118

Essay

As we saw in the chapter, some financial instruments are used primarily to transfer risk. Explain how a bread maker can use a financial instrument to transfer the following risk: the bread maker has the opportunity to provide bread to a local army base. The base figures they will need 10,000 loaves of bread each week, or roughly 500,000 for a year. The problem is the baker must quote a price for the entire year. The baker would really like to have this contract but he realizes that fluctuating input prices (specifically wheat) could result in significant losses.

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Definitions:

Extraneous Solutions

Solutions that emerge from the process of solving a problem but do not satisfy the original equation.

Extraneous Solutions

Answers that result from the equation-solving process but fail to meet the criteria of the initial equation.

Variation Terminology

Language and concepts used to describe how quantities change together.

Formula

A concise way of expressing information symbolically, as in a mathematical or chemical formula.