CHDerivaivesandRiskManagemen财务管理,英文

DerivativesecuritiesFundamentalsofriskmanagementUsingderivativestoreduceinterestrateriskCHAPTER18

DerivativesandRiskManagementIfvolatilityisduetosystematicrisk,itcanbeeliminatedbydiversifyinginvestors’portfolios.

Whymightstockholdersbeindifferenttowhetherornotafirmreducesthevolatilityofitscashflows?Increasetheiruseofdebt.Maintaintheiroptimalcapitalbudget.Avoidfinancialdistresscosts.Utilizetheircomparativeadvantagesinhedging,comparedtoinvestors.Reducetherisksandcostsofborrowing.ReasonsRiskManagementMightIncreasetheValueofaCorporationReducethehighertaxesthatresultfromfluctuatingearnings.Initiatecompensationprogramstorewardmanagersforachievingstableearnings.

Anoptionisacontractthatgivesitsholdertheright,butnottheobligation,tobuy(orsell)anassetatsomepredeterminedpricewithinaspecifiedperiodoftime.

Whatisanoption?Itdoesnotobligateitsownertotakeanyaction.Itmerelygivestheownertherighttobuyorsellanasset.Whatisthesinglemostimportantcharacteristicofanoption?Calloption:Anoptiontobuy

aspecifiednumberofsharesofasecuritywithinsomefutureperiod.Putoption:Anoptiontosellaspecifiednumberofsharesofasecuritywithinsomefutureperiod.Exercise(orstrike)price:Thepricestatedintheoptioncontractatwhichthesecuritycanbeboughtorsold.OptionTerminologyOptionprice:Themarketpriceoftheoptioncontract.Expirationdate:Thedatetheoptionmatures.Exercisevalue:Thevalueofacalloptionifitwereexercisedtoday=Currentstockprice-Strikeprice.Coveredoption:Acalloptionwrittenagainststockheldinaninvestor’sportfolio.Naked(uncovered)option:Anoptionsoldwithoutthestocktobackitup.In-the-moneycall:Acalloptionwhoseexercisepriceislessthanthecurrentpriceoftheunder-lyingstock.Out-of-the-moneycall:Acalloptionwhoseexercisepriceexceedsthecurrentstockprice.LEAPS:Long-termEquityAnticiPationSecuritiesaresimilartoconventionaloptionsexceptthattheyarelong-termoptionswithmaturitiesofupto21/2years.StockPriceCallOptionPrice$2530 7.5035 12.0040 16.5045 21.0050 25.50Exerciseprice=$25.Considerthefollowingdata:Createaprice,(b)strikeprice,(c)exercisevalue,(d)optionprice,and(e)premiumofoptionpriceovertheexercisevalue.PriceofStrikeExerciseValueStock(a) Price(b)ofOption(a)–(b)$25.00 $25.00$0.0030.0025.005.0035.0025.0010.0040.0025.0015.0045.0025.0020.0050.0025.0025.00ExerciseValueMkt.PricePremiumofOption(c)ofOption(d)(d)––(c)$0.00$3.00$3.005.007.502.5010.0012.002.0015.0016.501.5020.0021.001.0025.0025.500.50Table(Continued)Whathappenstothepremiumoftheoptionpriceovertheexercisevalueasthestockpricerises?Thepremiumoftheoptionpriceovertheexercisevaluedeclinesasthestockpriceincreases.Thisisduetothedecliningdegreeofleverageprovidedbyoptionsastheunderlyingstockpriceincreases,andthegreaterlosspotentialofoptionsathigheroptionprices.CallPremiumDiagram5101520253035404550StockPriceOptionvalue30252015105MarketpriceExercisevalueThestockunderlyingthecalloptionprovidesnodividendsduringthecalloption’’slife.Therearenotransactionscostsforthesale/purchaseofeitherthestockortheoption.kRFisknownandconstantduringtheoption’’slife.WhataretheassumptionsoftheBlack-ScholesOptionPricingModel?(More...)Securitybuyersmayborrowanyfractionofthepurchasepriceattheshort-term,risk-freerate.Nopenaltyforshortsellingandsellersreceiveimmediatelyfullcashproceedsattoday’sprice.Calloptioncanbeexercisedonlyonitsexpirationdate.Securitytradingtakesplaceincontinuoustime,andstockpricesmoverandomlyincontinuoustime.V=P[N(d1)]––Xe-kRFt[N(d2)].d1=.std2=d1–st.WhatarethethreeequationsthatmakeuptheOPM?ln(P/X)+[kRF+(s2/2)]tWhatisthevalueofthefollowingcalloptionaccordingtotheOPM?Assume:P=$27;X=$25;kRF=6%;t=0.5years:s2=0.11V=$27[N(d1)]––$25e-(0.06)(0.5)[N(d2)].ln($27/$25)+[(0.06+0.11/2)](0.5)(0.3317)(0.7071)=0.5736.d2=d1–(0.3317)(0.7071)=d1–0.2345=0.5736––0.2345=0.3391.d1=N(d1)=N(0.5736)=0.5000+0.2168=0.7168.N(d2)=N(0.3391)=0.5000+0.1327=0.6327.Note:ValueV=$27(0.7168)–$25e-0.03(0.6327)

=$19.3536–$25(0.97045)(0.6327)

=$4.0036.Currentstockprice:Calloptionvalueincreasesasthecurrentstockpriceincreases.Exerciseprice:Astheexercisepriceincreases,acalloption’svaluedecreases.Whatimpactdothefollowingpara-metershaveonacalloption’svalue?Optionperiod:Astheexpirationdateislengthened,acalloption’’svalueincreases(morechanceofbecominginthemoney.)Risk-freerate:Calloption’svaluetendstoincreaseaskRFincreases(reducesthePVoftheexerciseprice).Stockreturnvariance:Optionvalueincreaseswithvarianceoftheunderlyingstock(morechanceofbecominginthemoney).Corporateriskmanagementrelatestothemanagementofunpredictableeventsthatwouldhaveadverseconsequencesforthefirm.Whatiscorporateriskmanagement?Allfirmsfacerisks,butthelowerthoseriskscanbemade,themorevaluablethefirm,otherthingsheldconstant.Ofcourse,riskreductionhasacost.Whyiscorporateriskmanagementimportanttoallfirms?Speculativerisks:Thosethatofferthechanceofagainaswellasaloss.Purerisks:Thosethatofferonlytheprospectofaloss.Demandrisks:Thoseassociatedwiththedemandforafirm’sproductsorservices.Inputrisks:Thoseassociatedwithafirm’sinputcosts.DefinitionsofDifferentTypesofRisk(More...)Financialrisks:Thosethatresultfromfinancialtransactions.Propertyrisks:Thoseassociatedwithlossofafirm’sproductiveassets.Personnelrisk:Risksthatresultfromhumanactions.Environmentalrisk:Riskassociatedwithpollutingtheenvironment.Liabilityrisks:Connectedwithproduct,service,oremployeeliability.Insurablerisks:Thosethattypicallycanbecoveredbyinsurance.Step1.Identifytherisksfacedbythefirm.Step2.Measurethepotentialimpactoftheidentifiedrisks.Step3.Decidehoweachrelevantriskshouldbehandled.Whatarethethreestepsofcorporateriskmanagement?Transferrisktoaninsurancecompanybypayingperiodicpremiums.Transferfunctionsthatproducerisktothirdparties.Purchasederivativecontractstoreduceinputandfinancialrisks.Whataresomeactionsthatcompaniescantaketominimizeorreduceriskexposure?(More...)Takeactionstoreducetheprobabilityofoccurrenceofadverseevents.Takeactionstoreducethemagnitudeofthelossassociatedwithadverseevents.Avoidtheactivitiesthatgiverisetorisk.Financialriskexposurereferstotheriskinherentinthefinancialmarketsduetopricefluctuations.Example:Afirmholdsaportfolioofbonds,interestratesrise,andthevalueofthebondsfalls.Whatisafinancialriskexposure?Derivative:Securitywhosevaluestemsorisderivedfromthevaluesofotherassets.Swaps,options,andfuturesareusedtomanagefinancialriskexposures.Futures:Contractsthatcallforthepurchaseorsaleofafinancial(orreal)assetatsomefuturedate,butatapricedeterminedtoday.Futures(andotherderivatives)canbeusedeitherashighlyleveragedspeculationsortohedgeandthusreducerisk.FinancialRiskManagementConcepts(More...)Hedging:Generallyconductedwhere