Deal-contingent Hedging

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

So far we have dealt with risk management due to the volatility of market parameters, such as interest rates, currencies or inflation, but there is another source of uncertainty, referred to in Chapter 16, which is the underlying cashflow volatility – ie, the unpredictability of the underlying exposure that comes from the riskiness of the business itself. For instance, a EUR-based company buying a USD asset is exposed to the market volatility of EURUSD exchange rates. However, it is also exposed to uncertainty about its sales and costs in USD due to business cycles, competition in the industry and other factors beyond the control of the company that are not directly linked to the financial markets. We call all these sources of uncertainty “business risk”.

Business risk is outside of the scope of this book, since it is generally not dealt with by the financial departments and cannot be hedged using financial instruments. Nevertheless, business risk affects the risk management of financial risks. In Chapter 16, we described a decision matrix (Figure 16.2) that can be used to decide when to hedge the FX risk. In our simplified scheme, we divided all the possible situations into

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