The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Introduction to Credit Risk
Introduction to Credit Risk
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
Credit risk is the risk that one counterparty defaults on its payments to the other. The payments can be any kind of payable, including coupons and principal on debt, derivative payments or payments not linked to financial transactions – for example, payments for a delivery of a commodity or equipment.
Credit risk is a key risk for financial institutions due to their role as credit providers to the economy. However, here we focus on the credit risk of non-financial companies due to their bank exposures, which normally manifests itself in one of three ways:
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a counterparty risk on deposits, ie, the risk of default of the bank with whom the company has deposited money; and
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a counterparty risk on derivatives positions, ie, risk that the bank with whom the company has entered into a derivative position will default, which would expose the company to the risk of unwinding or replacing the derivative;
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the company’s own cost of credit, which impacts the refinancing cost of the company, and the credit charges that lenders apply to derivative transactions (xVA).
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We shall cover each kind of risk in turn in the five chapters that follow
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