FM12 Ch 23 Tool Kit -...

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b7d940feeeeaa66ea6d473bfe281d35f9c2aab32.xls Chapter Michael C. Ehrhardt Page 1 06/15/2011 1/14/2007 Chapter 23. Tool Kit for Derivatives and Risk Management OTHER TYPES OF DERIVATIVES (Section 23.4) SWAPS Antron Bosworth Floating rate: LIBOR + 1.00% 1.50% Fixed rate: 10.00% 10.40% Antron Bosworth Payment to lender: -LIBOR -1.00% -10.40% Payment to swap counterparty: -8.95% -LIBOR Payment from swap counterparty: +LIBOR 8.95% Net payment: -9.95% -LIBOR -1.45% USING DERIVATIVES TO REDUCE RISK (Section 23.6) HEDGING WITH FUTURES Size of futures contract (dollars per contract) = $100,000 Settle price on futures contract as quoted = 109 and 11 32nds Settle price on futures contract (% of par, decimal) = 109.343750% Settle price on futures contract (dollars) = $109,343.750 Change in price from previous day as quoted = 0 and 18 32nds Change in price on futures contract (% of par, decimal) = 0.56250% A derivative is a security whose values are determined by the market price or interest rate of some other asset. Derivatives are a primary aspect of risk management, because they offer financial planners and risk managers to hedge business risk. The term risk management can mean many things, but in business it involves identifying events that could have adverse financial consequences and taking actions to prevent and/or minimize the damage caused by such events. Effective risk management allows managers to control the costs of key inputs and protecting against changes in interest rates and exchange rates. Derivatives can include options (whose value depends upon the price of another some underlying stock or other financial asset), interest rate futures, exchange rate futures, and swaps (whose values depend on interest rate and exchange rate levels), and commodity futures (whose values depend on
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This note was uploaded on 06/15/2011 for the course FI515 FI515 taught by Professor Fi515 during the Spring '10 term at Keller Graduate School of Management.

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FM12 Ch 23 Tool Kit -...

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