Firms engage in transactions that subject them to specific financial risks.Most firms face risks-that is, variability of outcome-from changes in interest rates, foreign exchange rates, and commodity prices.Firms can purchase financial instruments to reduce these business risks, that is, to reduce the volatility of certain outcomes.Some of these instruments trade in relatively active markets, like marketable securities, while others have specialized terms and do not trade at all.The general term used for the types of financial instruments that firms might buy to mitigate the risks is a(n)

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The general term used for the types of financial instruments that firms might buy to mitigate the risks is a derivative. Derivatives are financial instruments whose value or return is derived from the value or return of an underlying asset, such as a stock, bond, currency, or commodity. Examples of derivatives include swaps, forwards, futures, and options, which can be used to manage or hedge risks associated with changes in interest rates, foreign exchange rates, or commodity prices. While some of these instruments trade in active markets, others have specialized terms and do not trade at all.

Firms Engage in Transactions That Subject Them to Specific Financial