International Finance and Accounting Handbook

Rates and Expropriation Risk.Unpublished working paper. Stanford University, November 1982. Jacque, L. L. “Management of Foreign ...

Smith, W. S. Jr. “Corporate Risk Management: Theory and Practice.”Journal of Derivatives, Vol. 2, No. 4, 1995. Smith, W. S. Jr., ...

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7 • 1 CHAPTER 7 INTEREST RATE AND FOREIGN EXCHANGE RISK MANAGEMENT PRODUCTS: OVERVIEW OF HEDGING INSTRUMENTS AND STRATEGIES Rich ...

correspondence between foreign exchange and interest rates. Hence, one of the im- portant tasks of financial management is to re ...

Borrowers often require money over longer periods of time (e.g., from 5 years to as long as 100 years). To hedge over longer per ...

Exhibit 7.1 also shows the inflation rate that occurred over the subsequent three- month period. The inflation rate is measured ...

recorded in Exhibit 7.1 on an annualized basis is: The volatility of foreign exchange rates can be computed on a similar basis. ...

(a) Forward and Long-Term Loan Contracts. Before considering the use of options and futures markets, we look at the traditional ...

ment of a future foreign exchange or interest rate, it can use a derivative as a stand- alone bet. However, if it wishes to hedg ...

tract is simply an agreement to buy or sell in the future. In Exhibit 7.4, this is indi- cated by a horizontal line on the LIBOR ...

7.6 HEDGING FOREIGN EXCHANGE AND INTEREST RATE RISK WITH FORWARD CONTRACTS. Firms and other large organizations often hedge thei ...

may be used purely as a speculative play on the future exchange rate, if the transac- tion is not directly related to the underl ...

So far, we have considered a long position in an FRA contract, which is appropri- ate for hedging a borrowing requirement. In co ...

ket parlance, this is referred to as a dollar call/euro put. Hence, it gives the holder the same payoff as a put option on the e ...

Note that both the strike rate (3%) and the option premium (0.5%) are quoted using the $LIBOR convention. They both, therefore, ...

7.10 INTEREST RATE SWAP. Firms often borrow money on a rolling or floating rate basis. Under a floating rate contract, every thr ...

7.11 INTEREST RATE CAPS AND FLOORS. An alternative way to hedge a long-term borrowing need is to buy an interest rate cap. This ...

7 • 16 INTEREST RATE AND FOREIGN EXCHANGE RISK MANAGEMENT PRODUCTS (a) Foreign Currency Swaps, Caps, and Floors.Corporations and ...

are foreign currency version of caps, floors, and swaptions, which are defined in an analogous manner. 7.12 FOREIGN EXCHANGE AND ...