The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Interest Rates: The Most Efficient Hedging Product
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
This chapter is a continuation of Chapter 10. After JSCOM adjusted its fixed-floating mix, its management realised that, prior to 2005, they were successfully using caps and collars to restrict the floating interest rates within a certain range. In 2005, the new accounting standards IAS 39 were introduced, according to which the time value of options was required to be recorded in P&L. At that point, JSCOM’s management decided that having the option volatility impact the P&L was not acceptable and, instead of comparing the pros and cons of options, stopped using them altogether. However, limiting the choice of products to only linear ones, ie, interest rate swaps, has its problems, the main one being that swaps lock the users into a certain level and don’t allow them to participate in improvements in the rate. During downward trends of swap rates, as experienced in the EUR between 2008 and 2016, the pay fixed swaps that many companies entered into previously became significantly out-of-the-money. In contrast to this, for those companies who had interest rate caps in their portfolio the loss was limited to the initial premium, while caps allowed them to benefit from the low floating
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