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Can Derivatives Actually Reduce Financial Risk?

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Executive Summary

Since the financial markets went haywire in 2008, corporate managers have been trying to understand better the effect of financial leverage on their enterprises and the overall economy. High levels of debt financing by financial institutions and property owners contributed to the crisis, but the lack of effective risk management at non-financial firms - like the Big 3 automakers, for instance - also played a role. Not understanding financial risk can lead to unexpected problems that cause financial distress for firms or keep them from undertaking profitable investment opportunities.

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