04-09-2012, 03:35 PM
Financial Risk Management
SIM Risk Management.ppt (Size: 649 KB / Downloads: 83)
The Case For Hedging
Company has special information
Company has special market access
Secure cash for investment opportunities
Reduce potential costs of financial distress, increase debt capacity, and reduce expected taxes
Since currency matching reduces the probability of financial distress, it allows the firm to have greater leverage and therefore a greater tax shield.
Which Firms Should Hedge?
Characteristics of firms for which financial stress is especially costly:
Firms with:
Products that require after-sale servicing
Products whose quality is difficult to determine in advance
Products with high switching costs
Products that rely on third-party servicing
And firms that have:
High-growth opportunities
Intangible assets like firm-specific human capital
Large excess tax deductions
Measuring Market Exposure
Defining corporate exposure:
“How will my company’s value be affected by market price fluctuations?”
Types of exposure
Transactions
Balance sheet/portfolio
Economic
A risk management framework
Transactions Exposure
Transactions exposure results from particular transactions such as an export where a known cash flow in a given currency will take place at a certain date
Example: If Nokia invoices a NTT of Japan in Japanese yen for a celphone shipment then the firm has Japanese yen exposure and can hedge this by borrowing yen.
This kind of exposure is readily hedgable using forwards, futures or debt