The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Theory and Practice of Corporate Risk Management
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
The largest part of this book is devoted to practical considerations on risk management issues in the form of case studies. Before we dig into them, we shall give a brief overview of what the academic literature has to say on this topic. As we go through the literature, it will become obvious that, in this field, theory is very far from practice. We shall point out the major areas of disagreement and give our thoughts on why they are there. We see this chapter as a bridge between theory and practice that we hope can help the academics to make their theories more applicable and the practitioners to better understand the fundamental underpinnings of the risk management practice.
PLAN OF THE CHAPTER
Since this is one of the longer and more complex chapters in the book, we start by summarising the main steps we will take and our main conclusions, and leave those readers who are interested in the details to read on. We start from the original Modigliani–Miller (MM) theorem (see Modigliani and Miller, 1958), which states under which conditions financial policies, including the risk management policy of a company, do not impact its valuation. We then develop a simple two time step
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