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Introduction

Introduction. Direction of Study. Investments Derivative Securities Options, Futures, Swaps Corporate Financial Strategies Corporate Challenges Derivative Security Usages Effective Management. Investments. Derivative Securities

blake-may
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Introduction

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Presentation Transcript

  1. Introduction

  2. Direction of Study • Investments • Derivative Securities • Options, Futures, Swaps • Corporate Financial Strategies • Corporate Challenges • Derivative Security Usages • Effective Management

  3. Investments • Derivative Securities • Financial Contracts that “derive” their value from some underlying asset price. • Options – Right to Buy/Sell • Futures – Commitment to Buy/Sell • Swaps – To switch out of one financial contract for another (usually multiple times across a horizon)

  4. Corporate Financial Strategies • Corporate Challenges • Product Price Uncertainties • Selling Price, Cost of Materials • Financing Uncertainties • Balance Sheet Funding • Transaction Exposure • Derivative Security Strategies • Effective Management: Hedging vs. Speculation

  5. Method of Study • Toolbox: Options, Futures, Swaps • Payoffs, Prices and Strategies • In-class problems, At-home review materials • Implementation • Trading Online • Hedge, Speculate • Cases

  6. Requirements • Group Work (4 person groups) • Trading Online • Cases • Individual Work • 2 exams across quarter, no Final Exam • MBAs: Paper on Derivatives (Plan an Appointment)

  7. Why Risk Management? • Higher Risk due to: • Inflation/DisInflation • Volatility of FX Rates • Volatility of Interest Rates

  8. Impact on Firms • Transaction Exposure: • Commodity Price Risk • Foreign Exchange Risk • Financing Exposure • Interest Rate Risk

  9. Market Response • Commodity Prices • Futures, Options, Swaps, Exotics • Foreign Exchange • Futures, Options, Swaps, Exotics • Interest Rates • Futures, Options (Caps & Floors), Swaps, Exotic Debt

  10. Reasons exist for active financial risk management SMOOTH EARNINGS!!! • Match Supply of Internally-generated funds with Demand for funds for Capital Expenditures • Match Employee’s incentives with Investors • Match Information Advantage with Transaction Ability & Cost of Transaction

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