The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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How to Develop an Interest Rate Risk Management Policy
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
In this chapter, we introduce several important qualitative aspects of an interest rate risk management policy. There are a large number of choices to be made in defining such a policy, and most companies formalise them in a risk management policy document. This document should provide a balance between operational freedom and company oversight and control. To achieve this, it has to specify the risk management parameters in sufficient detail that it protects the company against unauthorised use of derivatives while not paralysing the Treasury department, which has to implement the policy often quickly and in volatile market conditions. The main areas of any risk management policy document are:
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the risks that should be hedged and how;
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roles and responsibilities for various risk management functions (who does what);
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authorised derivative instruments;
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limits on the use of derivatives; and
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reporting requirements and when to deviate from the policy.
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BACKGROUND
A European media company, Media Corporation, is seeking to grow through acquisition. The company’s policy has historically been to grow
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