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1、24CHAPTERDerivatives and Risk ManagementIn this chapter, we discuss risk management, a topic of increasingimportance to financial managers. The term risk managementcan mean many things, but in business it involves identifyingevents that could have adverse financial consequences and thentaking action
2、s to prevent and/or minimize the damage caused bythese events. Years ago, corporate risk managers dealt primarilywith insurancethey made sure the firm was adequately insuredagainst fire, theft, and other casualties, and that it had adequateliability coverage. More recently, the scope of risk managem
3、enthas been broadened to include such things as controlling thecosts of key inputs like petroleum by purchasing oil futures,or protecting against changes in interest rates or exchangerates through transactions in the interest rate or foreignexchange markets. In addition, risk managers try to ensure
4、thatactions intended to hedge against risk are not actually increas-ing risks. Also, since the September 11, 2001 attacks on the WorldTrade Center and Pentagon, insurance against terrorist attackshas become a major issue. Unless possible terrorist targetsincluding large malls, office buildings, oil
5、refineries, airlines, andshipscan be insured against attacks, lenders will refuse to pro-vide mortgage financing, and that would crimp the economy.Private insurance companies are reluctant to insure these proj-ects, at least without charging prohibitive premiums, so the fed-eral government has been
6、asked to step in and provide terroristinsurance. Normally, it is best to have private projects insured byprivate insurance, because then risk-reducing actions will be 832IMAGE:GETTY IMAGES, INC., PHOTODISC COLLECTIONThe ThomsonNOW Web site contains anExcel file that will guide you through thechapter
7、s calculations. The file for thischapter is IFM9 Ch24 Tool Kit.xls, and we encourage you to open the file andfollow along as you read the chapter.19878_24_c24_p830-863.qxd 2/22/06 10:50 AM Page 832Chapter 24 Derivatives and Risk Management833taken to hold down insurance costs.1However, losses due to
8、 terrorist attacksare potentially so large that they could bankrupt even strong insurancecompanies. How this new risk should be dealt with is currently beingdebated in Washington and around the world.REASONS TO MANAGE RISKWe know that investors dislike risk. We also know that most investors hold wel
9、l-diversified portfolios, so at least in theory the only “relevant risk” is systematicrisk. Therefore, if you asked corporate executives what type of risk they were con-cerned about, you might expect the answer to be “beta.” However, this is almostAs you read this chapter, consider how youwould answ
10、er the following questions. Youshould not necessarily be able to answer thequestions before you read the chapter. Rather,you should use them to get a sense of the issuescovered in the chapter. After reading the chap-ter, you should be able to give at least partialanswers to the questions, and you sh
11、ould beable to give better answers after the chapter hasbeen discussed in class. Note, too, that it is oftenuseful, when answering conceptual questions, touse hypothetical data to illustrate your answer.We illustrate the answers with an Excel modelthat is available on the ThomsonNOW Web site.Accessi
12、ng the model and working through it is auseful exercise, and it provides insights that areuseful when answering the questions.1. What does it mean to “manage” risks? Shouldits stockholders want a firm to “manage” allthe risks it faces?2. What types of risks are interest rate andexchange rate swaps d
13、esigned to mitigate?Why might one company prefer fixed-ratepayments while another company prefersfloating-rate payments, or payments in onecurrency versus another?3. SafeCo can issue floating-rate debt at LIBORH11001 1 percent or fixed-rate debt at 8 percent,but it would prefer to use fixed-rate deb
14、t.RiskyCo can issue floating-rate debt at LIBORH11001 2 percent or fixed-rate debt at 8.8 percent,but it would prefer to use floating-rate debt.Explain why both companies might be betteroff if SafeCo issues floating-rate debt,RiskyCo issues fixed-rate debt, and they thenswap payment streams. Assume
15、that if theydo arrange a swap, SafeCo will make a fixedpayment of 6.9 percent to RiskyCo, andRiskyCo will make a payment of LIBOR(which is currently 6 percent) to SafeCo.4. What is a futures contract, and how arefutures used to manage risk? What are youprotecting against if you buy Treasuryfutures c
16、ontracts? What if you sell Treasuryfutures short?5. Stohs Semiconductor Corporation plans toissue $50 million of 20-year bonds in sixmonths. The interest rate would be 9 percentif the bonds were issued today. How canStohs set up a hedge against an increase ininterest rates over the next six months?Assume that six-month futures sell for 100-22.BEGINNING-OF-CHAPTER QUESTIONS1Most insurance policies exclude claims that result from acts of war. Now claims based on terrorist attacks are
