1、Chapter 24Fundamentals of Corporate FinanceFifth EditionSlides byMatthew WillMcGraw-Hill/IrwinCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved Risk ManagementCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 2Topics CoveredWhy Hedge?Reduc

2、ing Risk with OptionsFutures ContractsForward ContractsSwapsInnovation in the Derivatives MarketIs “Derivative” a Four-Letter Word?Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 3Why Hedge?Question of The DayWhat is a cereal company in the business of doin

3、g?A. Producing a product efficiently and selling it for a profit.B. Speculating on the price of sugar, wheat, and other inputs to its product.Answer: BothCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 4Why Hedge?Question of The DayThe company does A. by ch

4、oice and B. because it has no choice.The company can eliminate B through HedgingCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 5Reducing Risk With OptionsExample - Onnex sells crude oil. Since its costs are relatively fixed, fluctuations in the sale price

5、of crude oil can cause unexpected profits or losses.How might Onnex hedge this risk?Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 6Reducing Risk With OptionsExample - Onnex sells crude oil. Since its costs are relatively fixed, fluctuations in the sale pr

6、ice of crude oil can cause unexpected profits or losses.How might Onnex hedge this risk?Price per barrelOnnexs loses money when prices drop.RevenuesCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 7Reducing Risk With OptionsExample - Onnex sells crude oil. S

7、ince its costs are relatively fixed, fluctuations in the sale price of crude oil can cause unexpected profits or losses.How might Onnex hedge this risk?Price per barrelA put option makes money when prices drop.RevenuesCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/

8、Irwin24- 8Reducing Risk With OptionsExample - Onnex sells crude oil. Since its costs are relatively fixed, fluctuations in the sale price of crude oil can cause unexpected profits or losses.How might Onnex hedge this risk?Price per barrelOnnexs natural risk, plus a put option provides a HEDGE agains

9、t price declines.RevenuesCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 9Futures ContractsFutures Contract - Exchange traded forward contract with gains or losses realized daily.Profit to seller = initial futures price - ultimate market priceProfit to buye

10、r = ultimate market price - initial futures priceCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 10Future ContractsExample - The Farmers Hedge - A farmer owns wheat in her fields and wishes to hedge against a drop in the price she will potentially sell it f

11、or in the open market.Show the positions involved in this hedge.Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 11Future ContractsThe farmer loses money when the price dropsPrice per bushelValue of wheatExample - The Farmers Hedge - A farmer owns wheat in h

12、er fields and wishes to hedge against a drop in the price she will potentially sell it for in the open market.Show the positions involved in this hedge.Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 12Future ContractsExample - The Farmers Hedge - A farmer

13、owns wheat in her fields and wishes to hedge against a drop in the price she will potentially sell it for in the open market.Show the positions involved in this hedge.The futures contract profits when prices dropPrice per bushelValue of wheatCopyright 2007 by The McGraw-Hill Companies, Inc. All righ

14、ts reserved McGraw-Hill/Irwin24- 13Future ContractsExample - The Farmers Hedge - A farmer owns wheat in her fields and wishes to hedge against a drop in the price she will potentially sell it for in the open market.Show the positions involved in this hedge.With a futures contract the farmer locks in

15、 a pricePrice per bushelValue of wheatCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 14Financial FuturesGoal (Hedge) - To create an exactly opposite reaction in price changes, from your cash position. Commodities - Simple because assets types are finite.Fi

16、nancials - Difficult because assets types are infinite.You must attempt to approximate your position with futures via “Hedge Ratios.”Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 15Financial FuturesEurex BondGovt. GermanIMMYenIMMEuroIMMIndex s Poorand Sta

17、ndardIMMdeposits EurodollarCBTbondsTreasury U.S.CBTnotesTreasury U.S.ExchangeFutureCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 16Forward ContractsForward Contract - Agreement to buy or sell an asset in the future at an agreed price.Forward contracts are

18、 “custom designed” futures contracts. They have specific amounts and expiration dates to meet the buyers needs.Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 17SwapsSwap - Arrangement by two counterparties to exchange one stream of cash flows for another.C

19、ompanySwap DealerFixed rate pmtLIBOR pmtLIBOR pmtCopyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 18Available LoansAaa Corp Baa CorpFixed Rate Loan10%11.5%Variable Rate Loan7.25%7.50%SwapAaa Corp Borrows $1mil fixed loan 10% BAA Corp Borrows $1mil variable l

20、oan 7.5%Aaa assumes pmts on variable loan 7.5%Baa assumes pmts on fixed loan 10.75%Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 19Aaa BenefitPay Fix -10.00%Get Fix +10.75%Pay Var - 7.50%Var Sav + 7.25%Net Benefit+ .50%Available LoansAaa Corp Baa CorpFixe

21、d Rate Loan10%11.5%Variable Rate Loan7.25%7.50%Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 20Aaa BenefitBaa BenefitPay Fix -10.00%Pay Var - 7.50%Get Fix +10.75%Get Var + 7.50%Pay Var - 7.50%Pay Fix -10.75%Var Sav + 7.25%Fix Sav +11.50%Net Benefit+ .50%N

22、et Benefit+ .75%Available LoansAaa Corp Baa CorpFixed Rate Loan10%11.5%Variable Rate Loan7.25%7.50%Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 21Currency SwapsSimilar to interest rate swapsSame type loan, just diff currency WHY?example:you have an inves

23、tment in JapanProject is financed with US bondsYou look for SWAP partner so you can emulate holding Japanese bondsJavaYahooprincipalYen loan11%12%$ 1 mil$ loan8%11.1%or Y120Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin24- 22Currency Swapsexample - contJava borrows $1mil 8%Yahoo borrows Y120mil 12%Intl. Bank arranges swapJava swaps 8% $ loan for 10.3% yen loan w/bankYahoo swaps 12% yen loan for 10.4% $ loan w/banktotal available benefit = (11.1-8) - (12-11) = 2.1%Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved McG