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Cell Size Cells differ not only in their shape but also in their size. A few types of cells are large enough to be seen by the unaided human eye. For example, the nerve cells that extend from a giraffe’s spinal cord to its foot can be 2 m (about 6 1/2 ft) long. A human egg cell is about the size of the period at the end of this sentence. Most cells, how- ever, are only 10 to 50 μm in diameter, or about 1/500 the size of the period at the end of this sentence. The size of a cell is limited by the relationship of the cell’s outer surface area to its volume, or its surface area–to-volume ratio. As a cell grows, its volume increases much faster than its surface area does, as shown in Figure 4-5. This trend is important because the materials needed by a cell (such as nutrients and oxygen) and the wastes produced by a cell (such as carbon dioxide) must pass into and out of the cell through its surface. If a cell were to become very large, the volume would increase much more than the surface area. Therefore, the surface area would not allow materials to enter or leave the cell quickly enough to meet the cell’s needs. As a result, most cells are microscopic in size. Comparing Surface Cells Materials microscope, prepared slides of plant (dicot) stem and ani- mal (human) skin, pencil, paper Procedure Examine slides by using medium magnification (100). Observe and draw the sur- face cells of the plant stem and the animal skin. Analysis How do the surface cells of each organism differ from the cells beneath the surface cells? What is the function of the surface cells? Explain how surface cells are suited to their function based on their shape. Quick Lab Small cells can exchange substances more readily than large cells because small objects have a higher surface area–to-volume ratio. FIGURE 4-5 mb06se_csfs02.qxd 5/18/07 10:54 AM Page 73 74 CHAPTER 4 BASIC PARTS OF A CELL Despite the diversity among cells, three basic features are common to all cell types. All cells have an outer boundary, an interior sub- stance, and a control region. Plasma Membrane The cell’s outer boundary, called the plasma membrane (or the cell membrane), covers a cell’s surface and acts as a barrier between the inside and the outside of a cell. All materials enter or exit through the plasma membrane. The surface of a plasma mem- brane is shown in Figure 4-6a. Cytoplasm The region of the cell that is within the plasma membrane and that includes the fluid, the cytoskeleton, and all of the organelles except the nucleus is called the cytoplasm. The part of the cytoplasm that includes molecules and small particles, such as ribosomes, but not membrane-bound organelles is the cytosol. About 20 percent of the cytosol is made up of protein. Control Center Cells carry coded information in the form of DNA for regulating their functions and reproducing themselves. The DNA in some types of cells floats freely inside the cell. Other cells have a mem- brane-bound organelle that contains a cell’s DNA. This membrane- bound structure is called the nucleus. Most of the functions of a eukaryotic cell are controlled by the cell’s nucleus. The nucleus is often the most prominent structure within a eukaryotic cell. It maintains its shape with the help of a protein skeleton called the nuclear matrix. The nucleus of a typical animal cell is shown in Figure 4-6b. Most animal cells have a cell membrane, a nucleus, and a variety of other organelles embedded in a watery substance. The surface of the cell membrane can be seen in (a). The organelles inside the cell are labeled in the diagram (b). FIGURE 4-6 (a) (b) Mitochondrion Microfilaments Lysosome Golgi apparatus Smooth ER Ribosomes Cell membrane Microtubules Rough ER Nuclear pore Nuclear envelope Nucleolus Nucleus Copyright © by Holt, Rinehart and Winston. All rights reserved. Cell wall Ribosome Cell membrane Peptidoglycan Pili Flagellum DNA CELL STRUCTURE AND FUNCTION 75 A prokaryotic cell lacks a membrane- bound nucleus and membrane-bound organelles. Most prokaryotic cells are much smaller than eukaryotic cells are. FIGURE 4-7 A white blood cell (eukaryotic) changes shape as it attacks purple- stained bacterial cells that are much smaller (prokaryotic). FIGURE 4-8 TWO BASIC TYPES OF CELLS Fossil evidence suggests that the earliest cells on Earth were simple cells similar to some present-day bacteria. As cells evolved, they differentiated into two major types: prokaryotes and eukaryotes. Prokaryotes Prokaryotes (proh-KAR-ee-OHTS) are organisms that lack a membrane- bound nucleus and membrane-bound organelles. Although prokaryotic cells lack a nucleus, their genetic information—in the form of DNA—is often concentrated in a part of the cell called the nucleoid. Figure 4-7 shows a typical prokaryotic cell. Prokaryotes are divided into two domains: Bacteria and Archaea (ahr-KEE-uh). The domain Bacteria includes organisms that are similar to the first cellular life-forms. The domain Archaea includes organisms that are thought to be more closely related to eukaryotic cells found in all other kingdoms of life. Eukaryotes Organisms made up of one or more cells that have a nucleus and membrane-bound organelles are called eukaryotes (yoo-KAR-ee-OHTS). Eukaryotic cells also have a variety of subcellular structures called organelles, well-defined, intracellular bodies that perform specific functions for the cell. Many organelles are surrounded by a mem- brane. The organelles carry out cellular processes just as a person’s pancreas, heart, and other organs carry out a person’s life processes. Eukaryotic cells are generally much larger than prokary- otic cells, as seen in Figure 4-8, which shows a white blood cell (eukaryote) destroying tiny bacterial cells (prokaryotes).

Some Arctic Dinos Lived in Herds By Sid Perkins Just as interesting, however, is how this was discovered. Scientists didn’t look at a single fossil bone. Instead, they analyzed a large number of preserved footprints on a mountainside located toward the southern end of central Alaska. Anthony Fiorillo works at the Perot Museum of Nature and Science in Dallas, Texas. As a vertebrate paleontologist, he studies the fossils of creatures with backbones. In 2007, he was part of a research team exploring Denali National Park. “We rounded the corner and there they were,” he recalls. Thousands of footprints had been preserved in stone. “It was amazing.” Dinosaurs died out more than 65 million years ago (not counting birds, their modern-day relatives). So, it’s a bit surprising that scientists know so much about these ancient creatures. Now, a new study reveals that a certain type of duckbilled dinosaur lived in the Arctic year-round. These animals also traveled in herds that included many age groups, they find. The creatures even appear to have gone through a “teenage growth spurt.” Those tracks pepper a steep patch of exposed rock about twice as long as a football field and up to 60 meters (roughly 200 feet) wide. They sit at least 160 kilometers (100 miles) north of the Gulf of Alaska. Between 69 million and 72 million years ago, that now-rocky material was muddy sediment on a floodplain near a seacoast, Fiorillo explains. The hadrosaurs walked across the squishy mud. Later, the footprints they left turned to stone. Previous studies suggested adult duckbills took care of their young, says Fiorillo. The new evidence that these dinosaurs truly traveled in herds with multiple age groups confirms that parents cared for their young well beyond the time they left the nest, his team concludes. The researchers published their findings June 30 in Geology. © Science News for Students Thousands of tracks cover this rocky mountainside in Alaska’s Denali National Park. They provide a wealth of information about the size, age and lifestyle of certain dinosaurs. COURTESY OF PEROT MUSEUM OF NATURE AND SCIENCE EVIDENCE FOR HERDS O F DINOSAURS Small meat-eating dinosaurs called theropods had left behind a few of the tracks that Fiorillo’s team found in Denali. Birds had left some others. But the vast majority came from creatures called hadrosaurs. These large plant-eating duckbilled dinosaurs had been quite common during the Cretaceous Period. That helps explain one of their nicknames: “cattle of the Cretaceous.” For the new study, the researchers focused only on the hadrosaur tracks. More than half of the footprints were preserved so well that they had clear impressions of the skin on the dinosaurs’ feet. Most tracks had a similar level of preservation. That suggests all were probably left within a short period. Other fossils in the nearby rocks, including insect burrows, suggest these hadrosaurs had left their footprints during the summer. These are trace fossils — evidence of ancient life other than a preserved carcass or bone. At the time these dinosaurs lived, Fiorillio says, the average temperature in the warmest months was between 10° and 12° Celsius (50° and 54° Fahrenheit). That’s about what conditions are like today along the border between Canada and the lower 48 U.S. states, he notes. The team measured a large sample of the duckbills’ footprints. They fell into four distinct size ranges. The largest tracks, presumably made by adults, measured about 64 centimeters (25 inches) across. The smallest tracks, 8 centimeters (3 inches) wide, were likely left by young duckbills. They would have been no more than a year old. Tracks of two other size groups were probably made by juveniles and near-adults. These data suggest the community of hadrosaurs included four different age groups. © Science News for Students A hadrosaur footprint made roughly 70 million years ago. For scale, the long blue bar at right is 10 centimeters long; each small blue or white bar measures 1 centimeter. COURTESY OF PEROT MUSEUM OF NATURE AND SCIENCE © Science News for Students THESE DINOSAURS DIDN’T MIGRATE About 84 percent of the tracks sampled for the new study had been left by older hadrosaurs — adults or near-adults. Roughly 13 percent came from the youngest members of the herd. And a mere 3 percent came from herd members considered to be juveniles, says Fiorillo. The rarity of tracks by these tweens suggests that the young of this species had a rapid growth spurt. If true, they would have spent relatively little time at this vulnerable size — and therefore left very few tracks. “What’s really neat is how many small tracks there are,” notes Anthony Martin. An ichnologist — or expert in trace fossils — he works at Emory University in Atlanta, Ga. Other scientists had analyzed fossil bones from duckbills. These studies had hinted that the equivalent of adolescent hadrosaurs would have experienced growth spurts. But the new findings are “the best evidence that I’ve seen,” says Eric Snively. He’s a vertebrate paleontologist at the University of Wisconsin- La Crosse. “This is a great study,” he adds, “and further evidence that juvenile hadrosaurs grew up in an eye-blink.” Also previously, researchers had proposed that Arctic dinosaurs migrated farther south for the winter. That’s because even if the region was much warmer than it is today, nights in the high Arctic would have been 24 hours long. So, with no sunshine for several months, Alaska would have had long periods of very bleak, chilly weather. But finding juveniles in the herd strongly suggests that these dinosaurs remained in the Arctic all year. That’s because adolescents and preadolescents wouldn’t have had the strength or stamina to make those long treks, Fiorillo maintains. Field work is often harsh. Paleontologists studying the dinosaur footprints here on an Alaskan mountainside sometimes worked in cold and fog. COURTESY OF PEROT MUSEUM OF NATURE AND SCIENCE © Science News for Students The presence of very young dinosaurs might have been expected, he notes: If this were a nesting region, the babies would have hatched sometime just before summer. And remember, that’s when these tracks were left. But that wouldn’t explain the juveniles, he says. The team’s findings “suggest that these dinosaurs were overwintering in Alaska somehow,” says Snively. At the time, the average temperature in the region remained above freezing even during the winter, he notes. But, he adds, “this study raises interesting issues about how the dinosaurs could live in the region when it was pretty dark for several months at a time.”

Early society and accomplishments Origins Knowledge of the early prehistory of Southeast Asia has undergone exceptionally rapid change as a result of archaeological discoveries made since the 1960s, although the interpretation of these findings has remained the subject of extensive debate. Nevertheless, it seems clear that the region has been inhabited from the earliest times. Hominid fossil remains date from approximately 1,500,000 years ago and those of Homo sapiens from approximately 40,000 years ago. Furthermore, until about 7000 bce the seas were some 150 feet (50 metres) lower than they are now, and the area west of Makassar Strait consisted of a web of watered plains that sometimes is called Sundaland. These land connections perhaps account for the coherence of early human development observed in the Hoabinhian culture, which lasted from about 13,000 to 5000 or 4000 bce. The stone tools used by hunting and gathering societies across Southeast Asia during this period show a remarkable degree of similarity in design and development. When the sea level rose to approximately its present level about 6000 bce, conditions were created for a more variegated environment and, therefore, for more extensive differentiation in human development. While migration from outside the region may have taken place, it did not do so in a massive or clearly punctuated fashion; local evolutionary processes and the circulation of peoples were far more powerful forces in shaping the region’s cultural landscape. Technological developments and population expansion Perhaps because of a particular combination of geophysical and climatic factors, early Southeast Asia did not develop uniformly in the direction of increasingly complex societies. Not only have significant hunting and gathering populations continued to exist into the 21st century, but the familiar cultural sequences triggered by such events as the discovery of agriculture or metallurgy do not seem to apply. This is not to say that the technological capabilities of early Southeast Asian peoples were negligible, for sophisticated metalworking (bronze) and agriculture (rice) were being practiced by the end of the 3rd millennium bce in northeastern Thailand and northern Vietnam, and sailing vessels of advanced design and sophisticated navigational skills were spread over a wider area by the same time or earlier. Significantly, these technologies do not appear to have been borrowed from elsewhere but were indigenous and distinctive in character. Austronesian languages Austronesian languagesMajor divisions of the Austronesian languages. These technological changes may partially account for two crucial developments in Southeast Asia’s later prehistory. The first is the extraordinary seaborne expansion of speakers of Proto-Austronesian languages and their descendants, speakers of Austronesian (or Malayo-Polynesian) languages, which occurred over a period of 5,000 years or more and came to encompass a vast area and to stretch nearly half the circumference of Earth at the Equator. This outward movement of people and culture was evolutionary rather than revolutionary, the result of societal preference for small groups and a tendency of groups to hive off once a certain population size had been reached. It began as early as 4000 bce, when Taiwan was populated from the Asian mainland, and subsequently it continued southward through the northern Philippines (3rd millennium bce), central Indonesia (2nd millennium bce), and western and eastern Indonesia (2nd and 1st millennia bce). From approximately 1000 bce on the expansion continued both eastward into the Pacific, where that immense region was populated in a process continuing to about 1000 ce as voyagers reached the Hawaiian Islands and New Zealand, and westward, where Malay peoples reached and settled the island of Madagascar sometime between 500 and 700 ce, bringing with them (among other things) bananas, which are native to Southeast Asia. Thus, for a considerable period of time, the Southeast Asian region contributed to world cultural history, rather than merely accepting outside influences, as frequently has been suggested. The second development, which began possibly as early as 1000 bce, centred on the production of fine bronze and the fashioning of bronze-and-iron objects, particularly as they have been found at the site in northern Vietnam known as Dong Son. The earliest objects consisted of socketed plowshares and axes, shaft-hole sickles, spearheads, and such small items as fishhooks and personal ornaments. By about 500 bce the Dong Son culture had begun producing the bronze drums for which it is known. The drums are large objects (some weigh more than 150 pounds [70 kg]), and they were produced by the difficult lost-wax casting process and decorated with fine geometric shapes and depictions of animals and humans. This metal industry was not derived from similar industries in China or India. Rather, the Dong Son period offers one of the most powerful—though not necessarily the only or earliest—examples of Southeast Asian societies transforming themselves into more densely populated, hierarchical, and centralized communities. Since typical drums, either originals or local renditions, have been found throughout Southeast Asia and since they are associated with a rich trade in exotics and other goods, the Dong Son culture also suggests that the region as a whole consisted not of isolated, primitive niches of human settlement but of a variety of societies and cultures tied together by broad and long-extant trading patterns. Although none of these societies possessed writing, some displayed considerable sophistication and technological skill, and, although none appears to have constituted a territorial centralized state, new and more complex polities were forming.

LESSON 4. Cellular Respiration • Define cellular respiration • Identify the stages of clan respiration You have just learned how the energy from the sun is captured, processed, and stored in the form of glucose. Cellular respiration, another important life process, is the means by which cells release the stored energy in glucose to make adenosine triphosphate (ATP). The primary goal of this life process is to convert stored energy into usable form, such as ATP, for the cells to carry out their functions. Cellular respiration involves several chemical reactions. The reactions can be summed up in the following equation: C6 H12 O6 + 602 ----- 6 CO₂ +6H₂O + ATP Glucose oxygen carbon dioxide water energy Aerobic respiration reactions, or cellular respiration that takes place in the presence of oxygen, can be grouped into three stages glycolysis, Krebs cycle, and electron transport chain (ETC). Stage 1: Glycolysis Glycolysis is the process that breaks down one molecule of 6-C glucose into 3-C pyruvates or pyruvic acids. It also releases four molecules of ATP. This process occurs in the cytoplasm of the cell. The following is the step-by-step process of glycolysis. Take note that several enzymes are involved in this process. 1. The first step of glycolysis requires energy. It can only proceed when the two ATP molecules donate energy to the glucose by transferring a phosphate group with the help of an enzyme, producing glucose 6-phosphate 2. Then, a specific enzyme promotes the rearrangement of the atoms, producing the fructose 6-phosphate. 3. The action of the enzyme in step 2 promotes the transfer of a phosphate group from another ATP molecule, forming fructose 1,6-bisphosphate. 4. The resulting fructose 1,6-bisphosphate molecules, with the help of another enzyme, splits into two molecules, each with three carbon backbones. These two sugars are dihydroxyacetone phosphate and glyceraldehyde 3-phosphate. 5. Another important enzyme then rapidly interconverts the molecules of dihydro-xyacetone phosphate and glyceraldehyde 3-phosphate. This produces two molecules of glyceraldehyde 3-phosphate or 3-phosphoglyceraldehyde (PGAL) 6. The succeeding step involves another enzyme-mediated action. The hydrogen (H) from PGAL is transferred to the oxidizing agent, nicotinamide adenine dinucleotide (NAD), which forms NADH. A phosphate (P) is also added from the cytosol of the cell to oxidize the two molecules of PGAL, forming two 1.3-bisphosphoglycerate. 7. A phosphate (P) from 1,3-biphosphoglycerate is transferred to ADP to form ATP. This happens for each of the two 1,3-bisphosphoglycerate. resulting to a yield of two ATP and two 3-phosphoglycerate molecules. 8. A phosphate is transferred from 3-phosphoglycerate molecules from the third carbon to the second carbon, forming 2-phosphoglycerate molecules A hydrogen atom and a hydroxyl ((OH) group is released, which then combines to form water (H2O). The removal of H2O from 2-phosphoglycerate results in the formation of 2- phosphoglycerate molecules. 9. A hydrogen atom and a hydroxyl ((OH) group is released, which then combines to form water (H2O). The removal of H2O from 2-phosphoglycerate results in the formation of two phosphoenolpyruvic acid (PEP) 10. Phosphate (P) from PEP is transferred to ADP (and forms ATP) and the final product, pyruvic acid. This reaction yields two molecules of pyruvic acid and two ATP molecules In summary, a single glucose molecule that undergoes the process of glycolysis produces two molecules of pyruvic acid, four molecules of ATP, two molecules of NADEL and two molecules of H.O. However, only two molecules of ATP are counted as net products since two molecules of ATP are spent throughout the process. Stage II: Krebs Cycle The Krebs cycle, named after its proponent Sir Hans Adolf Krebs, is a cyclical series of enzyme-controlled reactions. This stage of cellular respiration occurs in the matrix of the mitochondria. It is sometimes. called the citric acid cycle (CAC) since it produces citric acid. Citric acid contains three carboxyl (COOH) groups; hence, it is also called the tricarboxylic acid cycle (TCA). This requires the pyruvic acids produced during glycolysis. The main function of this cycle is to produce high-energy-yielding molecules, namely, NADH and flavin adenine dinucleotide (FADH) that will later on be used in the electron transport chain reaction. Figure 6-7. Summary of glycolysis and corresponding products in each reaction presented (See Appendix F on page 285 for an enlarged and complete version of the image.) An initial process is needed for the Krebs cycle to begin. As a pyruvate molecule from glycolysis enters the mitochondrion, it undergoes an important preliminary ate to form acetyl-CoA reaction. Coenzyme-A (COA) combines with pyruvate help of an enzymatic complex. This conversion also produces CO, and NADH. The Krebs cycle is summarized as follows. Take note that several enzymes are involved in this process. 1. The Krebs cycle technically begins when the acetyl-CoA combines with oxaloacetic acid (OAA), a 4-C molecule, to produce citric acid, a 6-C molecule. 2. With the aid of an enzyme, the citric acid now goes through a series of reactions that releases energy. Water molecule is removed from the citric acid and is returned in a different location. The-OH group is repositioned, forming the molecule isocitrate. 3. Isocitrate is then oxidized, forming the a-ketoglutarate, a 5-C molecule. The byproducts of this reaction are NADH and CO, 4 The a-ketoglutarate loses its CO, and a coenzyme-A is added in its place. The decarboxylation occurs with the help of NAD, which then becomes NADH. The resulting molecule is called succinyl-CoA. 5. Succinyl-CoA is converted into succinate. Also in this reaction, a molecule of guanosine triphosphate (GTP) is synthesized. The GTP molecule has similar structure and energy properties to that of ATP and is used by cells the same way. The free phosphate group attacks the succinyl-CoA molecule, which detaches the COA. Then, phosphate is attached to GDP to come up with GTP, similar to the process that occur in ATP synthesis (from ADP to ATP). 6. Two hydrogens are removed from succinate, A molecule of flavin adenine dinucleotide (FAD), a coenzyme similar to NAD, is reduced to FADH, as it takes the hydrogens from the succinate. This reaction produces the fumarate. 7. Fumarate is then converted into malate as the addition of a water molecule is catalyzed. The final reaction is the regeneration of oxaloacetate. The resulting byproduct of this regeneration is NADH Recall that two pyruvate molecules were produced during glycolysis, causing the Krebs cycle to turn twice. Each tuts produces three molecules of NADH, single ATH one FADIH, and the by-product CO, which is exhaled. Stage III: Electron Transport Chain The electron transport chain (ETC) is a series of photon pumps on the inner membrane of the mitochondrion. Electron transport is the last stage of the cellular respiration. In this stage, the energy from NADH and FADH, from the Krebs cycle is transferred to ADP to produce ATP. This process is generally known as oxidative phosphorylation. This energy coupling mechanism in the cell was revealed by the work of Peter stored energy in the form of proton (1) gradient to phosphorylate (add phosphate) ADP and produce ATP. The pumping of hydrogen sons across the inner membrane creates higher concentration ions in the inner membrane than on the outside of the membrane. This chemiosmotic gradient causes the ions to flow back across the membrane where the concentration of ions is lower. ATP synthase lined in the matrix serve as a channel protein, helping the ions to move across the membrane. The chemiosmotic gradient powers the phosphorylation of ADP to ATP, which also occurs in the ATP synthase. After passing through the ETC, the oxygen, being the final hydrogen acceptor, combines with two electrons and two protons, forming a water molecule. Water is a by-product of cellular respiration and is excreted. MINI TEST 6-3 1. Which energy-releasing pathway yields the most ATF in each glucose molecule? 2. Briefly describe the two stages of aerobic respiration that follow glycolysis: (a) Krebs cycle (b) Electron transport chain Anaerobic Respiration Most cells carry out arrobic respiration when oxygen is present. Aerobic respiration is an efficient process that yields a lot of ATP. However, many organisms thrive in mud, marshes, animal gut, canned goods, sewage treatment pond, and deep oceans where oxygen is scarce. Organisms that can live without oxygen are called anaerobes. Cellular respiration that proceeds without the presence of oxygen is called anaerobic respiration. In the event that the oxygen supply becomes low, aerobic cells also perform fermentation and lactic acid fermentation anaerobic pathways. There are two common anaerobic pathways in these cells, alcoholic fermentation and lactic acid fermentation. In alcoholic fermentation, ethyl alcohol and carbon dioxide are produced by some cells using the pyruvate from glycolysis. Each pyruvate molecule is rearranged into acetaldehyde and carbon dioxide, which is eventually released. NADII gives up electrons to acetaldehyde to form ethanol Fermentation is widely used in the industry. Yeast, a fungus used in making bread. can undergo anaerobic respiration. Bakers aux sugar, flour, water, and yeast to form the bread dough. The dough rises due to the carbon dioxide and alcohol released by the yeast cells trapped in air bubbles. Beer and wine manufacturers, we yeast to ferment the sugars in wheat and grape juice, forming alcoholic beverages such as beer and wine. In some cells, glycolysis produces two pyruvates, two NADH molecules, and two ATP molecules. Pyruvate itself becomes the final acceptor of the electrons from the NADH that produces the final product: lactate. Oftentimes, this product is called lactic acid. Human skeletal muscles can carry out fermentation when the blood cannot supply the cells with adequate oxygen during strenuous activities. When lactic acid builds up in the muscles, fatigue, burning sensation, and cramps result. Lactic acid will continue to build up until there is adequate supply of oxygen. Lactic acid is then converted back into pyruvate in the liver. Muscles also restore normal functions. Have you ever wondered why milk or cream turns sour after some time? Bacterial cells that undergo fermentation are responsible in producing lactate that turns the milk sour. These bacteria are used in manufacturing yogurt and sour milk products. Fermentation pathways do not breakdown and utilize the glucose completely. ATP is no longer produced beyond the process of glycolysis. Thus, energy produced is just enough for some single-celled organisms, or the energy can only be used by multicellular organisms for a short period.

When Europeans met American Indians in the late 15th century, the people of two continents exchanged many beneficial customs and goods. Europeans received New World crops such as potatoes and corn. American Indians acquired cloth and horses. However, besides the beneficial exchanges, Europeans and American Indians often traded deadly germs–bacteria and viruses–for which they had no immunity. Smallpox and Indians Image 1: Smallpox epidemics helped Europeans conquer the Aztec and Incan Empires of Mexico and South America. North American Indians quickly concluded that contact with Europeans often resulted in devastating diseases that caused widespread death. This drawing, made in the 1500s in Mexico, shows how the disease was passed from a European to an American Indian through simple contact. Many of the diseases that were common in Europe were entirely new to the peoples of North America. Diseases such as tuberculosis and measles could be fatal, but Europeans had developed resistance to the disease, so many people survived. However, when European diseases infected American Indians with no previous exposure, the people suffered terribly. The most devastating of these diseases was smallpox which is caused by a virus (Variola major). Smallpox, like many other diseases, had a latent period of about one week between the time the person was exposed to the disease and the time when signs of the disease became apparent. During this time, the sick person might begin a journey and carry the germs along with him. Anyone the person met would be exposed to smallpox. Anything the victim touched including clothing, bedding, or unwashed dishes carried living germs of smallpox. Cotton Mather Image 2: Cotton Mather was a Boston minister. When smallpox threatened Boston, he remembered reading about how the Turks inoculated people with dried material from smallpox blisters. The inoculation usually gave the person a mild case of the disease and future immunity. The procedure was highly controversial, but it helped save the lives of 274 people who were inoculated during the Boston smallpox epidemic of 1721. Symptoms of the disease began with fever, chills, and aches. The fever might raise a person’s temperature from the normal 98.6o to a dangerous 106o. After four days of misery, the victim entered the second stage when large pustules (fluid-filled bumps) appeared on the body. The rash made the person feel as if their skin were on fire. After suffering with the rash for nine days, the victim entered a new stage-if he or she had survived this long. The pustules opened and dried up. Each pustule formed a scab that turned into a scar that marked the person’s face for the rest of his or her life. Complications of smallpox for those who survived might include loss of vision or damage to the lungs, heart, or liver. Waterhouse Image 3: Dr. Benjamin Waterhouse of Harvard University brought Jenner’s smallpox preventative to the United States. It was called vaccination and used cowpox as the infective material. This much milder form of pox gave immunity to smallpox with fewer complications. Dr. Waterhouse encouraged President-elect Thomas Jefferson to promote vaccination. Jefferson responded, “Every friend of humanity must look with pleasure on this discovery, by which one evil more is withdrawn from the condition of man.” (T. Jefferson 12/25/1800 to Benjamin Waterhouse, December 25, 1800) Historians have found evidence of smallpox as far back as 1157 B.C. when the Egyptian pharaoh Ramses V apparently died of smallpox. From Egypt, where scientists believe smallpox began, the disease spread to Asia. Europeans began to experience periodic epidemics of smallpox in the14th century when Crusaders returning from the Middle East brought smallpox to Europe. People who survived the disease were immune and could not get smallpox again. This fact explains why epidemics struck periodically and the disease was not a constant threat to European societies. Smallpox Vaccination 1803 Image 4: Dr. Edward Jenner’s new smallpox vaccination (from cowpox) was widely accepted. This medical image was published by a Spanish physician to teach colonial doctors how to apply the vaccine to native Mexicans. The scratches were supposed to go through several stages of development as evidence that the vaccine had given the patient immunity. Vaccination was very effective in preventing smallpox epidemics among those who received the vaccine. In 1520, while Cortés was trying to conquer the Aztecs, smallpox broke out among the Spaniards and was transferred to the Aztecs. By 1527, the disease had migrated through Central America to Peru where it helped Pizarro conquer the Incas. (See Image 1.) In 1633, smallpox infected American Indians living near the English colony of Plymouth, Massachusetts. The disease traveled very quickly to tribes living far inland from the English colonies. In 1721, a smallpox epidemic threatened the English colonists of Boston. (See Image 2.) Cotton Mather, a Boston minister, wanted to inoculate people against the disease. He knew that Turkish healers took material from a dried smallpox scab and injected it into the body of a healthy person by scratching the surface of the skin. The patients developed a mild form of the disease from which they recovered. The procedure was highly controversial in Boston where about 280 Bostonians accepted inoculation. The epidemic infected more than half of the people living in Boston at the time. About 15% of those who got sick died of the disease. Among those who were inoculated, only six (2%) died of smallpox. The practice of inoculation spread to other English colonies, but not to the American Indian tribes living near the colonies. Late in the 18th century, British doctor Edward Jenner recognized that people who milked cows never came down with smallpox. They had already been infected with cowpox, a similar, but much milder disease that gave them immunity to smallpox. In 1796, Jenner inoculated a young man with cowpox virus he had collected from a milkmaid. The young man had a mild infection for less than 24 hours and recovered. Jenner’s efforts resulted in a widespread acceptance of vaccination (vaccine comes from Latin words meaning “taken from a cow”). By 1800, many Americans were receiving smallpox vaccinations. (See Image 3.) President Thomas Jefferson supported and encouraged the vaccination program in major American cities. (See Image 4.) By the middle of the 19th century, smallpox was under control, but broke out from time to time among unvaccinated people. Bismarck, Dakota Territory, experienced a small outbreak of smallpox in 1882. American Indians, however, were still subject to the disease in its most dangerous form.

Introduction to Hedging Instruments: Forwards, Futures, Options, and Swaps Hedging instruments are financial tools used by businesses and investors to mitigate risk. These instruments help protect against adverse price movements in assets such as commodities, currencies, interest rates, or securities. The four main hedging instruments are forwards, futures, options, and swaps. 1. Forwards A forward contract is a customised agreement between two parties to buy or sell an asset at a predetermined price on a specified future date. Key Characteristics: Over-the-counter (OTC): Traded directly between parties, not on an exchange. Customisation: Can be tailored to suit the needs of the parties involved. Settlement: Occurs at the end of the contract, which may involve physical delivery or cash settlement. Risk: Forwards carry counter-party risk, as there is a possibility one party may default. Example: A company that needs to import raw materials in six months may enter into a forward contract to lock in the current price, avoiding the risk of price increases. 2. Futures A futures contract is similar to a forward, but it is standardised and traded on an exchange. This standardisation eliminates counter-party risk. Key Characteristics: Standardised: Contract size, expiration, and other terms are fixed by the exchange. Mark-to-market: Gains and losses are settled daily. Liquidity: Futures are highly liquid because they are traded on exchanges. Regulation: As they are traded on formal exchanges, they are more regulated than forwards. Example: A wheat farmer may sell futures contracts to hedge against a possible decline in wheat prices before harvest. 3. Options Options provide the right, but not the obligation, to buy or sell an asset at a specified price on or before a certain date. There are two types of options: call options and put options. Call Option: Gives the holder the right to buy an asset at a predetermined price. Put Option: Gives the holder the right to sell an asset at a predetermined price. Key Characteristics: Premium: The buyer pays a premium upfront to obtain the option. Limited Risk: The maximum loss is limited to the premium paid. Flexibility: Options can be used for speculative or hedging purposes. Example: An investor holding stocks may buy a put option to protect against potential declines in the stock's price. 4. Swaps A swap is a contract in which two parties agree to exchange cash flows or liabilities over a specific period. The most common types are interest rate swaps and currency swaps. Key Characteristics: Customizable: Like forwards, swaps are often tailored to meet the needs of the parties involved. Counterparty Risk: Swaps are typically OTC instruments, exposing parties to default risk. Common Uses: Used to manage interest rate risk or currency risk. Example: A company with a variablerate loan may enter into an interest rate swap to exchange its variable payments for fixedrate payments, thus locking in stable costs. Hedging instruments are essential for managing financial risk in volatile markets. Each instrument serves different purposes, with varying levels of complexity, risk, and customization. Whether through forwards, futures, options, or swaps, businesses can better plan for the future by reducing exposure to uncertain price fluctuations. Hedging Strategies for Market Risk, Credit Risk, and Currency Risk 1. Hedging Strategies for Market Risk Market risk (also known as systematic risk) arises from fluctuations in asset prices, such as stocks, bonds, commodities, and interest rates, due to economic factors or market volatility. Key Hedging Instruments for Market Risk: Derivatives (Options, Futures, and Forwards): These instruments allow investors to hedge against unfavorable price movements in stocks, commodities, or interest rates. Example: An investor holding a large stock portfolio might buy a put option to protect against a potential market downturn. If the market declines, the put option increases in value, offsetting losses in the portfolio. Short Selling: Investors can sell borrowed assets with the expectation of buying them back at a lower price, profiting from the decline. Example: A fund manager expecting a market decline may short sell stocks to hedge a portfolio against losses. Common Hedging Strategies: Portfolio Diversification: Reducing market risk by spreading investments across various asset classes (stocks, bonds, commodities) and sectors. Using Index Futures: Large portfolios can be hedged using index futures that track the performance of the overall market. If the market declines, profits from the short position in the futures contract will offset losses in the portfolio. Risk Parity: Allocating assets based on the level of risk rather than the dollar amount invested, balancing risk exposure across asset classes. 2. Hedging Strategies for Credit Risk Credit risk refers to the possibility that a borrower will default on a debt obligation. This is especially important for banks, lenders, and institutions dealing with bonds and loans. Key Hedging Instruments for Credit Risk: Credit Default Swaps (CDS): A financial derivative where the buyer of a CDS pays a premium to the seller in exchange for protection against a default on a loan or bond. Example: A bank holding corporate bonds can buy a CDS to ensure they are compensated if the issuing company defaults. Collateralised Debt Obligations (CDOs): These instruments pool together various debt instruments and allow risk to be distributed among multiple investors. Credit Insurance: Companies may use insurance to protect against the risk of a customer defaulting on payments. Common Hedging Strategies: Diversification of Loan Portfolio: Spreading out credit exposures across various industries, geographies, and borrower profiles reduces the overall risk of default. Tightening Lending Standards: Limiting exposure to highrisk borrowers by implementing stringent credit assessments. AssetBacked Securities: Banks can sell loans or bonds packaged as assetbacked securities to reduce their exposure to credit risk. 3. Hedging Strategies for Currency Risk Currency risk (or exchange rate risk) arises from fluctuations in foreign exchange rates, which can affect companies involved in international trade or with investments in foreign countries. Key Hedging Instruments for Currency Risk: Forward Contracts: A firm agrees to exchange a specified amount of currency at a predetermined exchange rate on a future date. Example: A U.S. exporter expecting payment in euros might enter into a forward contract to sell euros and lock in a favorable exchange rate. Currency Options: These give the right, but not the obligation, to buy or sell currency at a specific price. Example: A U.S.based company buying goods from Japan might buy a call option on the yen to hedge against the risk of yen appreciation. Currency Swaps: Two parties exchange interest payments and principal in different currencies to hedge against exchange rate fluctuations. Common Hedging Strategies: Natural Hedging: Companies can offset currency risk by balancing foreign revenue with costs in the same currency. For example, if a company generates revenue in euros, it can also incur expenses in euros, reducing exposure to exchange rate fluctuations. Multi-Currency Invoicing: Firms can invoice in their home currency, shifting the currency risk to the buyer. Currency Diversification: Holding a diversified basket of currencies can reduce exposure to large fluctuations in any one currency. Effective hedging strategies are crucial for managing various types of risks in financial markets. Market risk can be managed using instruments like futures and options, while credit risk can be mitigated through diversification and credit derivatives. Currency risk, often faced by multinational firms, can be hedged using forward contracts, options, or swaps. Each strategy helps firms and investors protect their portfolios, ensure financial stability, and reduce the impact of adverse movements in the financial markets. Portfolio Risk Management Techniques: Diversification, Asset Allocation, and Risk Budgeting Managing risk is a fundamental aspect of portfolio management. Investors use various techniques to control and reduce the risks inherent in investing. Three key techniques used in portfolio risk management are diversification, asset allocation, and risk budgeting. Each of these techniques helps in mitigating potential losses while aiming to achieve the desired return. 1. Diversification Diversification is a risk management strategy that involves spreading investments across different assets, sectors, or geographic regions to reduce exposure to any single risk. The idea is that different assets perform differently under various market conditions, so losses in one investment can be offset by gains in others. Key Benefits of Diversification: Reduction of Unsystematic Risk: Unsystematic risk, which is unique to a specific company or industry, can be reduced by holding a variety of investments that respond differently to market conditions. Improved Stability: A diversified portfolio is less volatile, as the negative performance of one asset can be balanced by the positive performance of others. Methods of Diversification: Across Asset Classes: Investing in a mix of asset classes such as stocks, bonds, commodities, and real estate. Example: A portfolio with 60% equities, 30% bonds, and 10% commodities is more diversified than one solely consisting of stocks. Within Asset Classes: Diversifying within a single asset class (e.g., holding stocks from different sectors like technology, healthcare, and energy). Geographic Diversification: Investing in assets across various countries or regions to mitigate country-specific risks. Example: Holding U.S. stocks along with emerging market equities can reduce risks related to a downturn in one country's economy. 2. Asset Allocation Asset allocation refers to the process of dividing investments among different asset classes (such as stocks, bonds, and cash) to align with an investor's risk tolerance, time horizon, and financial goals. Asset allocation plays a crucial role in portfolio risk management by determining the overall risk-return profile of the portfolio. Key Elements of Asset Allocation: Strategic Asset Allocation: A longterm approach that involves setting target allocations for different asset classes based on financial goals and risk tolerance. Example: A young investor with a longterm horizon might allocate 70% to stocks, 20% to bonds, and 10% to cash. Tactical Asset Allocation: A more active approach that involves adjusting the asset mix in response to short-term market conditions. Example: If the investor expects an economic downturn, they might temporarily reduce exposure to equities and increase exposure to bonds. Types of Asset Allocation Models: Conservative: Focuses on preserving capital with a larger allocation to bonds and cash (e.g., 20% stocks, 80% bonds). Balanced: A moderate risk approach with an equal focus on growth and income (e.g., 50% stocks, 50% bonds). Aggressive: Targets higher returns by investing predominantly in equities, accepting higher risk (e.g., 80% stocks, 20% bonds). Example of Asset Allocation: A 40 year old investor with moderate risk tolerance may allocate their portfolio as follows: 50% equities, 40% bonds, and 10% in alternative investments such as real estate or commodities. The equities provide growth potential, while the bonds and alternative assets offer stability and income. 3. Risk Budgeting Risk budgeting is a method of allocating risk across different components of a portfolio, rather than focusing solely on returns. The goal is to optimise the portfolio’s risk-return profile by distributing risk in a way that aligns with the investor’s objectives and risk tolerance. Key Concepts of Risk Budgeting: Risk Contribution: Each asset class or investment in the portfolio contributes a certain amount of risk (measured by metrics such as volatility or Value at Risk). Risk budgeting ensures that no single asset class dominates the overall risk of the portfolio. Example: A portfolio may contain 60% stocks and 40% bonds, but if the stocks are highly volatile, they may contribute 90% of the portfolio's risk. Target Risk: Investors set a maximum acceptable level of risk (e.g., a portfolio volatility of 10%) and allocate investments so that the total risk remains within this target. Techniques in Risk Budgeting: Risk Parity: Allocates risk evenly across asset classes, rather than allocating capital based solely on return expectations. Example: In a risk-parity portfolio, both bonds and stocks might be balanced in such a way that they contribute equally to the overall portfolio risk, even though the dollar investment in bonds may be larger due to their lower volatility. Value at Risk (VaR): This technique measures the potential loss in a portfolio over a specific time period, under normal market conditions, at a given confidence level. The risk budget ensures that the potential loss stays within acceptable limits. Example of Risk Budgeting: An investor targets an overall portfolio risk of 8% volatility. After analyzing the risk contribution of each asset class, they determine that equities, which currently make up 60% of the portfolio, contribute 70% of the risk. To adhere to the risk budget, the investor may reduce their equity exposure and increase their allocation to bonds or other less volatile assets. Diversification, asset allocation, and risk budgeting are complementary techniques used in portfolio risk management. Diversification reduces unsystematic risk by spreading investments across various assets. Asset allocation ensures that investments align with an investor's goals and risk tolerance. Risk budgeting focuses on managing the contribution of risk from each asset class to create a balanced and efficient portfolio. Together, these strategies help investors achieve a balance between risk and return, ensuring longterm portfolio stability. Risk Mitigation Through Insurance, Securitisation, and Other Financial Engineering Techniques Risk mitigation is a core objective in financial management, and various strategies can be employed to reduce or manage risks. Three major approaches are insurance, securitisation, and financial engineering techniques. Each of these methods helps firms and individuals transfer, reduce, or eliminate certain financial risks. 1. Insurance as a Risk Mitigation Tool Insurance is a traditional risk transfer method that protects against financial losses by shifting the risk to an insurance company in exchange for premium payments. It is widely used to mitigate various forms of risk, such as operational, liability, and property risks. Key Aspects of Insurance for Risk Mitigation: Risk Transfer: The insurer takes on the risk in exchange for a premium, thus protecting the insured party from unexpected financial losses. Indemnity: In the event of a loss, the insurance policy compensates the insured based on the terms of the contract. Customisable Coverage: Insurance policies can be tailored to address specific risks, such as property damage, business interruption, liability, or cyber risks. Types of Insurance for Businesses: Property and Casualty Insurance: Covers physical assets like buildings, machinery, and inventory from risks like fire, theft, or natural disasters. Liability Insurance: Protects businesses against legal liabilities arising from accidents, negligence, or professional errors. Business Interruption Insurance: Compensates for lost income if a business has to halt operations due to unforeseen events. Credit Insurance: Shields companies from losses due to the nonpayment of trade receivables. 2. Securitisation as a Risk Mitigation Technique Securitisation is a financial engineering process that involves pooling various financial assets (such as loans, mortgages, or receivables) and converting them into marketable securities. This process allows firms to transfer risk to investors, thereby reducing their exposure. Key Elements of Securitisation: Risk Transfer: By securitising assets, companies can transfer the risk of default or nonpayment to investors who purchase the securities. Liquidity Creation: Securitisation converts illiquid assets (like mortgages or loans) into liquid, tradeable securities, improving cash flow for the originating firm. Diversification of Risk: Pooling assets with different risk profiles reduces the impact of individual defaults, spreading the risk across multiple investors. Common Forms of Securitisation: MortgageBacked Securities (MBS): Pools of mortgages are bundled and sold as securities to investors, transferring the risk of mortgage defaults. Example: A bank that issues home loans can bundle those loans into MBS and sell them to investors, transferring the credit risk of potential defaults. Asset-Backed Securities (ABS): Similar to MBS, but backed by other types of assets like credit card receivables, auto loans, or student loans. Collateralised Debt Obligations (CDOs): Structured financial products that pool different types of debt, such as loans and bonds, and sell them as securities with varying risk levels. Example: A bank may issue a portfolio of auto loans and then pool these loans into an assetbacked security (ABS). The ABS is sold to investors, who take on the risk of loan defaults. By securitising the loans, the bank reduces its exposure to credit risk and generates immediate cash flow. 3. Financial Engineering Techniques for Risk Mitigation Financial engineering involves the use of complex financial instruments, derivatives, and structured products to manage or mitigate financial risks. These techniques allow firms to hedge against specific risks, optimize capital structure, and improve financial stability. Common Financial Engineering Techniques: Derivatives: Financial instruments like futures, forwards, options, and swaps are used to hedge against price fluctuations, interest rate changes, or currency movements. Example: A company with significant foreign exchange exposure may use currency forwards or options to hedge against exchange rate fluctuations, ensuring predictable cash flows. Options and Futures: Options: Provides the right (but not the obligation) to buy or sell an asset at a predetermined price, allowing firms to hedge against unfavorable price movements. Example: An airline company can buy options on jet fuel to hedge against rising fuel prices. Futures: Standardized contracts to buy or sell an asset at a set price on a future date, commonly used to hedge commodities or financial assets. Example: A wheat producer may use futures contracts to lock in a favorable price for its crop, hedging against a potential price drop. Swaps: These involve the exchange of cash flows between two parties, often used to manage interest rate risk or currency risk. Interest Rate Swaps: Firms can exchange floatingrate interest payments for fixedrate payments to hedge against rising interest rates. Currency Swaps: Used to hedge exchange rate risk in crossborder transactions by exchanging principal and interest payments in different currencies. Example: A company with a variablerate loan may enter into an interest rate swap to exchange its variable payments for fixedrate payments, locking in stable costs. Structured Products: These are customised financial instruments designed to achieve specific riskreturn objectives. They often combine derivatives with other securities to create tailored risk exposures. Example: A structured note that combines a bond with an embedded option, offering downside protection while allowing for potential upside linked to the performance of an equity index. Credit Derivatives: Tools like credit default swaps (CDS) allow investors to transfer credit risk to other parties. Example: A bondholder worried about a company’s potential default may purchase a CDS, which pays out in case of a default event. Example: A company may issue a bond with an embedded call option, allowing it to repurchase the bond if interest rates decline. This financial engineering tool enables the company to mitigate the risk of rising interest rates, reducing future borrowing costs. Risk mitigation through insurance, securitisation, and financial engineering offers businesses a variety of tools to manage and transfer risks. Insurance allows for the direct transfer of risk to an insurer, while securitisation helps companies offload risk by packaging and selling assets as securities. Financial engineering techniques, including derivatives, swaps, and structured products, provide sophisticated ways to hedge market, interest rate, and currency risks. Each approach helps organizations improve financial stability, enhance liquidity, and manage potential losses in a volatile market environment.

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