Optimal Currency Composition of Debt 1: Protect Book Value

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

Large multinational companies can issue debt in multiple currencies, and one of the most frequently asked questions is: what should be the optimal mix of debt by currency? Even once the debt has been issued, it is not too late to synthetically change the currency composition via cross-currency swaps.

Companies that optimise their debt mix typically have one of two main objectives.

    • Protect the book value of equity: Some companies decide to protect the book value of equity by minimising the mismatch between the assets and debt by currency.

    • Protect the leverage: Others protect the leverage by minimising the currency mismatch between the debt and EBITDA or assets. This stabilises ratios such as net debt to EBITDA or net debt to assets.

What do companies care most about: reducing the volatility of the book value of equity or leverage? Reducing the volatility of the income statement would be easier to understand since earnings of publicly listed companies are heavily scrutinised by both investors and analysts. However, under IFRS 9 it is hard to protect consolidated EBITDA from the FX volatility of foreign subsidiaries. Therefore, who monitors the book value

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