Lecture Fundamentals of corporate finance - Chapter 24: Risk management: An introduction to financial engineering

T24.1 Chapter Outline Chapter 24 Risk Management: An Introduction to Financial Engineering Chapter Organization 24.1 Hedging and Price Volatility 24.2 Managing Financial Risk 24.3 Hedging with Forward Contracts 24.4 Hedging with Futures Contracts 24.5 Hedging with Swap Contracts 24.6 Hedging with Option Contracts 24.7 Summary and Conclusions CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw­Hill copyright © 2002 McGraw­Hill Ryerson, Ltd. T24.2 Example: Statement of Risk Management Policy at Walt Disney Company “The company’s foreign currency revenues continue to grow and thus, Disney’s management believes it is prudent to reduce the risk associated with fluctuations in the value of the US dollar in the foreign exchange markets. The Company uses foreign currency forward and option contracts to reduce the impact of changes in the value of its existing foreign currency assets and liabilities, commitments and anticipated foreign currency revenues denominated in Japanese yen, French francs, German marks, British pounds, and other currencies. The primary focus of the company’s foreign exchange risk management program is to reduce earnings volatility. By policy, the company maintains hedge coverages between minimum and maximum percentages of its anticipated foreign exchange exposures for each of the next five years.” (Emphasis added) Excerpt from the Walt Disney Company 1995 Annual Report Irwin/McGraw­Hill copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 2 T24.3 1997-1999 Currency crises Irwin/McGraw­Hill copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 3 T24.4 Nortel Networks stock price (logarithmic scale) 100 10 1 Irwin/McGraw­Hill copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 4 Date T24.5 The Risk Management Process Step 1: Identify the source of the risk exposure. Is the nature of the risk financial, currency, commodity, energy? Step 2: Quantify the risk exposure. What is the extent of the potential loss? Step 3: Assess the impact of the exposure(s) on the firm’s business and financial strategies. Is hedging always beneficial? To whom, and under what conditions? Step 4: Assess honestly your firm’s ability to design and implement a risk management program. Does enough expertise exist within the firm to operate the program (or to hire someone to do so)? Step 5: Select the appropriate risk management products. Adapted from Financial Risk Management by Tim Campbell and William Kracaw, HarperCollins Publishing, 1993 Irwin/McGraw­Hill copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 5 ... - tailieumienphi.vn