The use of derivatives to manage risk dates back nearly 4,000 years. And despite the current anti-derivatives uproar--fueled by the popular press, driven by well-regarded financiers like Warren Buffett and George Soros, and accompanied by government proposals to prohibit, limit, tax, or further regulate derivatives--these irreplaceable instruments are in truth straightforward and vital to numerous financial practitioners and companies.

Risk Transfer provides a basic understanding of the driving economic theory behind derivatives and risk transfer, then examines the advanced application and implementation of derivative instruments by corporations and institutional investors. Building the book around his popular University of Chicago graduate course, Professor Christopher L. Culp explores three fundamental areas in the structure and use of derivatives:

PART I: The Economics of Risk Transfer
Micro and macro foundations underlying risk transfer as a financial activity, and the evolution and use of derivatives as an efficient means of transferring risk

PART II: Derivatives Valuation and Asset Lending
The function of derivatives as intertemporal and interspatial resource allocation markets, with discussions of related concepts including own rates of interests, the cost of carry, backwardation and contango in the term structure of futures/forward prices, basis and spread relations, and more

PART III: Speculation and Hedging
The role of--and risk premium paid to--speculators, how firms determine their specific objectives and hedge ratios, and how hedging is affected by and can be used to address quality and calendar basis risks

While derivatives have always been--and will always be--a necessary tool in managing exposure to financial risk, professionals must understand the entire picture before they can successfully relate to its individual components. Risk Transfer helps researchers and practitioners to fill in that picture, providing a comprehensive examination of the theoretical foundations of derivatives as risk transfer instruments along with hands-on techniques and examples of how that theory can be successfully applied to the everyday practice of financial risk management.