Bachelor's thesis (Turku University of Applied Sciences) Degree Program in Business Management

Another type of hedging operations deals with options. It 
describes the mechanism of investment risk management that is 
common for all financial operations with securities, currencies, real 
assets or other types of derivatives.
Unlike futures contracts, trading with options does not impose any kind of 
obligation for the buyer to actually complete a transaction, however, it does 
provide the buyer with a possibility to buy or sell the option at an agreed price 
(“strike price” – 
investopedia.com
) in the course of a certain time frame.
Often considered to be an extremely volatile financial instrument, call options (a 
right to buy) and put options (a right to sell) allow investors to exploit the price 
difference on various financial assets over a certain period of time.
The core concept of the described hedging mechanism revolves around the 
operations with a principle payment (a premium) that grants the right to conduct 
trading activities with a certain security on agreed terms: predetermined price, 
quantity and time periods (Casu, Girardone and Molyneux, 2006, p. 238).
As has already been identified, this type of hedging strategy is usually 
subdivided into “call option” contracts that provide the right to buy a security at a 
specified price, “put options” granting the right to sell at a certain price, as well 
as the ones that allow the holder to purchase or sell a financial asset at an 
agreed price. In other words, the price that the company pays for the purchase 

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
option can be essentially considered to be a type of insurance payment, called 
a premium (Machiraju, 2008, p. 280-281). 
In order to illustrate this idea, the focus 
of reader’s attention should be shifted to 
the following examples: suppose that two investors have different thoughts 
about the way future market changes are going to effect the prices at the stock 
market. While investor A is assured that the market price of certain shares will 
indeed increase, investor B is the one who believes otherwise. What follows is a 
call option contract from investor A (buyer) that gives him a possibility (an 
option) to buy a specified number of the company’s shares at an agreed price 
from investor B in the future.
It is imperative to mention that both investors are taking a risk here: investor A 
is in danger if the price of shares does indeed fall, and investor B is at risk if it 
rises. Note that investor A has to make a premium payment with the contract. 
And this is what makes call options so attractive 
– you can use loan (credit) 
funds in order to acquire the shares, as at first you only have to make the 
premium payment.
Forward contracts usually deal with a trading of a certain financial 
asset on an agreed future date at a specified price. It is imperative 
to underline the crucial importance of this financial instrument for 
commercial banks, as well as every other participant of financial 
market: while currency forwards provide buyers and sellers with 
an additional possibility of hedging against unexpected 
fluctuations in currency exchange rates, they also serve the 
purpose of protection from changes in the interest rates (therefore, 
are considered as primary hedging instruments against market 
group risks) (Casu, Girardone and Molyneux, 2006, p. 237).  
 
Hedging operations using the "swap" method describe risk 
management strategies that deal with currency, securities and 
debt financial obligations of the business entity.

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
Having briefly described the topic of “swap” operations in previous chapters, we 
already know that a “swap” is an exchange operation (buying and selling) of the 
relevant financial asset, currency or even interest rate in order to improve the 
quality level of an investment portfolio, reduce potential losses or mitigate risks: 
in particular, the stock “swap” operations that deal with a commitment to 
transform one type of securities into another, for instance, traded bonds issued 
by companies in their shares (Casu, Girardone and Molyneux, 2006).