Risk Management

Corporate finance convertible debt is the combination

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Unformatted text preview: , have 20- 25% in cash. Financial guarantees: Used for municipal bonds Find some credible borrower and say you’d like to find municipal guarantee for hese bonds (and now they are rated AAA) they care that warren buffett is insuring them. Insurance contracts: Some types of insurance you are required to get (fire insurance) Clear thinking, better monitoring, better security Think about whether you are diverse enough, what risks you are bearing, counter- parties, etc. Options: they are hidden all around us, mortgages have options They are all around us; they are a form of “derivative” as their price is based upon or derived from another asset’s value Real estate – a “good faith deposit” to “tie up” a parcel of property Residential mortgages have an implicit put option; ie. The ability to refinance at a lower rate. Corporate finance – convertible debt is the combination of straight debt plus a call option; callable bonds Regular bond + option to convert to equity Insurance – a form of put option Employee stock options – commonly issued to executives at start ups and publicly traded companies “collars” used by shareholders who sell to public companies and want to protect the value of what they receive mark Cuban used options to protect the value of his Yahoo! Stock received from the sale of Broadcast.com. buy the put, sell the call (if price of yahoo moves up a lto, you call it away from me, but i...
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This document was uploaded on 03/27/2014 for the course FINC 150 at Georgetown.

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