How to Improve Your Fixed-Floating Mix and Duration

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

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.

BACKGROUND

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