Financial Modelling 2557A/B Chapter Notes - Chapter 4: Risk Aversion
17 Apr 2017
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Unhedged profit: not involved in any risk management. Can hedge a existing position with a forward contract - this will look exactly like a bond. If prices rise, there is no prospect for greater profit. Increase debt capacity: debt capacity: the amount a firm can borrow. Managerial risk aversion: risk-averse an individual with an expected payoff=money at stake. Must prepare for tax and accounting consequences of transactions. Hedge ratio: the ratio of the forward position to the underlying asset. Cross-hedging: the use of a derivative on one asset to hedge another asset.
