The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Deal-contingent Hedging
Deal-contingent Hedging
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
So far we have dealt with risk management due to the volatility of market parameters, such as interest rates, currencies or inflation, but there is another source of uncertainty, referred to in Chapter 16, which is the underlying cashflow volatility – ie, the unpredictability of the underlying exposure that comes from the riskiness of the business itself. For instance, a EUR-based company buying a USD asset is exposed to the market volatility of EURUSD exchange rates. However, it is also exposed to uncertainty about its sales and costs in USD due to business cycles, competition in the industry and other factors beyond the control of the company that are not directly linked to the financial markets. We call all these sources of uncertainty “business risk”.
Business risk is outside of the scope of this book, since it is generally not dealt with by the financial departments and cannot be hedged using financial instruments. Nevertheless, business risk affects the risk management of financial risks. In Chapter 16, we described a decision matrix (Figure 16.2) that can be used to decide when to hedge the FX risk. In our simplified scheme, we divided all the possible situations into
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