The Application Value of Option Instruments in Risk Management within Corporate Finance

Ziyu Peng

doi:10.54097/8t0c9b38

Authors

Ziyu Peng University College London, London, UK

DOI:

https://doi.org/10.54097/8t0c9b38

Keywords:

Options, corporate finance, risk management, hedging, real options, derivatives

Abstract

Option instruments are frequently used in corporate finance to reduce the risk of a decline in price asymmetrically and do not restrict the upward movement of the price. Research on the application of options in enterprise risk management. The above options are relatively more suitable for handling the firms' uncertain exposures and non-linear risks and demand for strategic flexibility. Options are relatively precise hedging instruments for foreign exchange risk, commodity price risk and interest-rate risk, etc., and can be used to manage equity exposure of a company. Based on the study of corporate option use and real options and option incentives, the four dimensions of value in this paper are downside protection, flexible hedging, strategic real-option value, and risk governance. In short, options are for speculation; however, if they are well-managed by the company, the risk can be reduced and firm value increased at the same time.

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