IFM10 Ch24 Lecture

IFM10 Ch24 Lecture - Chapter24 DerivativesandRiskManagement...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
  1 Chapter 24 Derivatives and Risk Management
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  2 Topics in Chapter Risk management and stock value  maximization.  Derivative securities. Fundamentals of risk management. Using derivatives to reduce interest rate  risk.
Background image of page 2
  3 Do stockholders care about  volatile cash flows? If volatility in cash flows is not caused  by systematic risk, then stockholders  can eliminate the risk of volatile cash  flows by diversifying their portfolios.  Stockholders might be able to reduce  impact of volatile cash flows by using  risk management techniques in their  own portfolios.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  4 How can risk management increase  the value of a corporation? Risk management allows firms to: Have greater debt capacity, which has a  larger tax shield of interest payments. Implement the optimal capital budget  without having to raise external equity in  years that would have had low cash  flow due to volatility. (More. .. )
Background image of page 4
  5 Risk management allows  firms to: Avoid costs of financial distress. Weakened relationships with suppliers. Loss of potential customers. Distractions to managers. Utilize comparative advantage in  hedging relative to hedging ability of  investors. (More. .. )
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  6 Risk management allows  firms to  (Continued): Reduce borrowing costs by using  interest rate swaps. Example:  Two firms with different credit  ratings, Hi and Lo: Hi can borrow fixed at 11% and floating  at LIBOR + 1%. Lo can borrow fixed at 11.4% and  floating at LIBOR + 1.5%. (More. ..
Background image of page 6
  7 Hi wants fixed rate, but it will issue floating and “swap”  with Lo.  Lo wants floating rate, but it will issue fixed and  swap with Hi.  Lo also makes “side payment” of 0.45%  to Hi.     Hi            Lo CF to lender -(LIBOR+1%) -11.40% CF Hi to Lo -11.40% +11.40% CF Lo to Hi +(LIBOR+1%) -(LIBOR+1%) CF Lo to Hi +0.45% -0.45% Net CF -10.95% -(LIBOR+1.45%) (More…)
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  8 Risk management allows  firms to: Minimize negative tax effects due to  convexity in tax code. Example:  EBT of $50K in Years 1 and  2, total EBT of $100K, Tax = $7.5K each year, total tax of $15. EBT of $0K in Year 1 and $100K in  Year 2, Tax = $0K in Year 1 and $22.5K in Year 2.
Background image of page 8
  9 What is corporate risk  management? Corporate risk management is the  management of unpredictable events  that would have adverse consequences  for the firm.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  10 Different Types of Risk Speculative risks:  Those that offer the  chance of a gain as well as a loss. Pure risks:  Those that offer only the 
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/08/2011 for the course FIN 360 taught by Professor Smith during the Spring '10 term at Park.

Page1 / 41

IFM10 Ch24 Lecture - Chapter24 DerivativesandRiskManagement...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online