Answer Posted / kalyani
Securities that derive their value from other financial
instruments that are used by the insurance company to hedge
its bets on which direction the market is moving. For
example, cattle futures are a simple derivative in that the
cattle futures contract increases or decreases in value as
future prices change for cows on the hoof. When insurance
companies use derivatives, they are more likely to use them
in association with currency and interest rate transactions
as a means of protecting themselves against adverse moves
in interest rates or foreign currency exchanges. This
instrument provides a mechanism for hedging against the
interest rate risks that are inherent within insurance
products by pricing in that risk in advance and protecting
against future negative occurrences.
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