The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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How to Improve Your Fixed-Floating Mix and Duration
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
This is one of the longest chapters in the book and also one of the most important ones. In our experience, many companies wish to find out the optimal fixed-floating debt ratio, but struggle to find the right answer because there are so many different aspects that have to be taken into account: historical performance of fixed versus floating debt; cyclicality of their revenues and its correlation with Libor or Euribor; projected leverage; tactical aspects; etc. Our approach necessarily has to simplify things a bit, and present only what is common and most important for the majority of companies.
In Chapter 5, we showed how to determine the optimal debt duration based on the choice between refinancing risk and funding cost. Once the debt is in place, the company still has the freedom to adjust the debt structure via interest rate swaps. For instance, the company can decide to swap bonds into floating, or loans into fixed.
There are two separate but closely linked issues here: how much debt should be fixed versus floating (eg, fixed-floating mix), and for how long should the rates be fixed (eg, interest rate duration). We will answer both questions in this chapter.
BACKGROUN
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