Introduction to Equity Risk

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

We conclude this book with a short section on corporate risks arising from the volatility of listed equity shares. The subject of equity risk and equity derivatives always attracts a significant amount of media attention.11 See, for example, “An Opaque $3.5 Billion Business Gives Wall Street a Hangover”, Bloomberg News, March 28, 2018. Why is this the case and where does the mystique of equity risk come from? The first reason is that most people are more familiar with stock markets than with other risk classes, such as interest rates or currencies. The second reason for the fascination with equity risk is that it is often linked to large M&A transactions from the front pages of the business press. On the other hand, corporate equity derivative deals are rare, generally secretive and less is understood about them than about other kinds of corporate risks. This is in contrast with the everyday topic of currency risk, where the deals are very regular, generally straightforward and attract little or no media attention, except in those rare cases when something goes wrong.

As we saw in Figure 1.4 in Chapter 1, the corporate use of equity derivatives is way behind FX and interest

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