Early Warning Signals

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

Emerging markets (EMs) such as Brazil, China and Russia are no longer “emerging”. It seems that the names given to those economies are always outdated. We used to call them “developing countries” in the 1980s, then “emerging markets” thereafter, and now that many emerging markets have emerged, perhaps the best term would be “local markets”. Faced with a stagnant or low-growing economy in the developed world, many companies are finding that their most significant growth areas are the EMs of Asia, Latin America and Africa. Most of these markets offer high growth due to a rapidly growing population with increasing purchasing power and consumer needs. However, there are many risks, both financial and operational, when exploring new horizons. In this section, we will focus on the currency risk.

Currency risk in EMs is in many ways different from the developed markets. The key differences are outlined below.

    • Unlike the developed market currencies, EM currencies are often managed or pegged. For example, some Middle Eastern currencies are pegged to the USD. This tends to make the markets less liquid, and therefore the risks of depreciation often difficult to predict.

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