Explain the Four Ways of Managing Risk

question 75

Essay

Explain the four ways of managing risk.

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Definitions:

Equity

represents the value of an ownership interest in a company, measured as the difference between assets and liabilities; it reflects what shareholders would theoretically receive if all assets were liquidated and debts repaid.

Leveraged Firm

A company that utilizes borrowed money or debt to finance its operations and expansion, potentially increasing its returns or losses.

Call Option

A financial contract that gives the holder the right, but not the obligation, to buy a specified amount of an underlying asset at a set price within a specific time frame.

American Option

A category of options agreement allowing execution at any moment prior to its expiry date.