Fin 352 fall 2018 W Evening Session(1).docx

8 hedging with futures and forwards the objectives of

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8.- Hedging With Futures and Forwards: The objectives of this section are to (1) describe the practice of hedging with financial futures as an institution’s ability to manage risk, leading to lower costs, and higher efficiency of operations, thereby enhancing firm valuation and benefiting stakeholders, (2) describe the markets for financial futures; (3) hedging as a financial position put on to reduce the impact of a risk the firm is exposed to; (4) describe the principles of hedging with futures contracts and (5) provide an overview of different situations where futures contracts can be used for hedging. Topics include hedging with financial futures, interest rate hedging, short interest rate hedges, and long interest hedges. Hedging investments in long term securities, cross hedging. Further topics include price relationships, spreads and portfolio hedging; hedging interest rate and currency gaps and managing interest rate risk and duration hedging.
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Reading: Saunders, Chapter 22, pp. 696-732. 9. - Hedging With Options, Caps, Floors, and Collars: The objectives of this section are to (1) describe hedging with options as a risk management tool which lowers costs, increases efficiency, and benefits stakeholders by raising the firm’s valuation; (2) describe hedging of interest rate exposures; (3) describe hedging of different investment portfolios; (4) outline alternative option investment strategies; and (5) discuss hedging of corporate risk exposures. Topics include hedging interest rate risk, interest rate ceilings, double option strategies, vertical bull and bear spreads and straddles. Further topics include hedging short and long interest rate positions, short and long stock positions, as well as Portfolio hedging and using options to establish a delta hedge. Reading: Saunders, Chapter 23, pp. 733-773. 10. – Hedging With Swaps Swaps as a portfolio of forward contracts with different maturity dates. Interest rate swap buyers make fixed rate payments. Swap sellers make floating rate payments. Balance sheets and cash flows of interest rate swaps. Macrohedging with swaps and the notional value of swaps; on-and-off balance sheet effects of a swap hedge. Currency and credit swaps and swaps and credit risks concerns. Reading: Saunders, Chapter 24, pp. 774-799. 11. – Credit Risk: Individual Loan Risk Credit quality problems. Types of loans. The contractual return on a loan versus the expected return on a loan. Retail versus wholesale credit decisions. Measurement of credit risk: qualitative and quantitative models. Term structure derivation of credit risk and the probability of default on a multiperiod debt instrument. Mortality rate derivation of credit risk. The risk-adjusted return on capital model (RAROC). Option models of default risk. Reading: Saunders, Chapter 11, pp. 317-368.
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