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International Finance

Essay by   •  July 12, 2010  •  Essay  •  256 Words (2 Pages)  •  1,183 Views

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Non-financial companies do not have the advantages to make money or clear understanding of the risk involved, so they should not try to speculate for make money from the currency or interest-rate. Speculate in derivative, the companies' owner is also able to accept the risk beyond. If they can invest in an investment bank that instead of trading derivative, in this way, they can speculate on currency or interest-rate.

Sometimes, the non-financial companies may want to speculate for make money from the commodity-price movements. Of course, they have to produce the products and then distribute them or do this in any other ways. If they do like this, it will give the knowledge of the commodity that an edge will be given for this commodity then the profit can be got from these commodity derivatives. However, the companies must to know the risk involved with these actions. For instance, so many energy producers and distributors recently are becoming involved with trading energy and energy derivatives. Actually, many of these companies cannot clearly know the risk involved with their speculating. Through the above example, we can see speculate of movements in currency, interest-rate or commodities are not the good financial activities. If the companies want to do, they must clearly understand about the risk and have the absolutely advantages when compare with other participants over the market. However, these are difficult for non-financial companies, compare with these non-financial companies, financial companies have resources which non-financial companies do not have like skilled traders or sophisticated Models and so on.

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