chap24 - My interest is in the future because I am going to...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Saunders and Cornett, Financial Instit 1 “My interest is in the future because I am going to spend the rest of my life there.” Charles F. Kettering
Background image of page 1

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

View Full DocumentRight Arrow Icon
Saunders and Cornett, Financial Instit 2 Hedging Risk for FIs Microhedge Hedge the risk of a specific asset or liability. Macrohedge Naïve Hedge = Perfect Hedge for a Microhedge = Routing Hedge for Macrohedge Eliminates all risk of a position. Immunized. Most FIs hedge selectively. Basis Risk Residual Risk that cannot be hedged because price fluctuations on cash and derivatives position differ. Step-by-Step Hedging Procedure
Background image of page 2
Saunders and Cornett, Financial Instit 3 Step-by-Step Hedging Procedure Step 1 Risk analysis of underlying cash position. Step 2 Quantification of impact on the cash position of interest rate/exchange rate changes. Step 3 State the goal of the hedge Step 4 Set up perfect hedge to use as a benchmark to implement hedge.
Background image of page 3

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

View Full DocumentRight Arrow Icon
Saunders and Cornett, Financial Instit 4 Macrohedge Procedure Step 1 Step 2 Step 3 Step 4 Interest rate risk Cash flows when: Hedge goal: + cash flows when: Examples of hedge: DG > 0 Interest rates Interest rates : Short hedge Sell financial futures Buy put options DG < 0 Interest rates Interest rates : Long hedge Buy financial futures Buy call options Exchange rate risk Net exposure > 0 Exchange rates Exchange rates : Short hedge Sell forwards Buy put options Net exposure < 0 Exchange rates Exchange rates : Long hedge Buy forwards Buy call options
Background image of page 4
5 Futures/Forwards: A Definition The obligation to buy (long) or sell (short) An underlying financial security At a predetermined price = futures/forwards price = P F On a preset date – the delivery date. If prices increase, long receives positive cash flows from short position holder. If prices decrease, short receives positive cash
Background image of page 5

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

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/27/2011 for the course FINANCE Fixed Inco taught by Professor Proflim during the Three '09 term at University of Adelaide.

Page1 / 18

chap24 - My interest is in the future because I am going to...

This preview shows document pages 1 - 6. Sign up to view the full document.

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