Textbook Notes (368,089)
Canada (161,636)
Commerce (1,690)


4 Pages
Unlock Document

Trevor Chamberlain

Commerce 2FA3 Chapter 24 Risk Management An introduction to Financial EngineeringHedging and Price VolatilityHedging Reducing a firms exposure to price or rate fluctuations Also immunizationDerivative security A financial asset that represents a claim to another financial asset Managing Financial RiskFinancial managers need to identify the types of price fluctuations that have the greatest impact on the value of the firmThe Risk ProfileA plot showing how the value of the firm is affected by changes in prices or ratesIncrease in prices increases valueReducing Risk ExposurePrice fluctuations have 2 components1 Shortrun essentially temporary changes2 Long run essentially permanent changesHedging Short Run Exposure Transitory changes are shortrun temporary changes in prices that result from unforeseen events or shocksTransactions exposure Shortrun financial risk arising from the need to buy or sell at uncertain prices or rates in the near futureHedging Long Term Exposure Economic exposure Longterm financial risk arising from permanent changes in prices or other economic fundamentals Hedging with Forward Contracts Forward Contracts The BasicsA legally binding agreement between 2 parties calling for the sale of an asset or product in the future at a price agreed upon today The terms of the settlement call for one party to deliver the goods to the other on a certain date in the future called the settlement dateThe other party pays the previously agreedupon forward price ad take the goods Can be bought and sold The buyer of the forward contract has the obligation to take delivery and pay for the goods the seller has the obligation to make delivery and accept payment They buyer benefits if prices increase because the buyer will have locked in a lower priceThe Payoff ProfileA plot showing the gains and losses that will occur on a contract as the result of unexpected price changes Hedging with Future ContractsFutures contract A forward contract with the feature that gains and losses are realized each day rather than only on the settlement date The daily resettlement feature found in futures contracts in called markingtomarketCrosshedging Hedging an asset with contracts written on a closely related but not identical assetHedging with Swap Contracts Swap contract An agreement by 2 parties to exchange or swap specified cash flows at specified intervals in the future Just a portfolio or a series of forward contractsCurrency SwapsTwo companies agree to exchange a specific amount of one currency for a specific amount of another at specific dates in the futureInterest Rate SwapsMight involve exchanging one floatingrate loan for another as way of changing the underlying index The 2 firms make each others loan paymentsCommodity SwapsAn agreement to exchange a fixed quantity of a commodity at fixed times in the future
More Less

Related notes for COMMERCE 3FA3

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.