Principles of Corporate Finance

Topics Covered w Insurance w Hedging With Futures w Speculating and Margin w SWAPS ...

Insurance w Most businesses face the possibility of a hazard that can bankrupt the company in an instant. w These risks are neit ...

Insurance Example An offshore oil platform is valued at $1 billion. Expert meteorologist reports indicate that a 1 in 10,000 cha ...

Insurance Example - cont. An offshore oil platform is valued at $1 billion. Expert meteorologist reports indicate that a 1 in 10 ...

Insurance Example - cont. An offshore oil platform is valued at $1 billion. Expert meteorologist reports indicate that a 1 in 10 ...

Insurance w Why would an insurance company not offer a policy on this oil platform for $100,000? ËAdministrative costs ËAdverse ...

Insurance w The loss of an oil platform by a storm may be 1 in 10,000. The risk, however, is larger for an insurance company sin ...

Hedging Business has risk Business Risk - variable costs Financial Risk - Interest rate changes Goal - Eliminate risk HOW? Hedgi ...

Hedging Ex - Kellogg produces cereal. A major component and cost factor is sugar. w Forecasted income & sales volume is set ...

Hedging 1- Spot Contract - A contract for immediate sale & delivery of an asset. 2- Forward Contract - A contract between tw ...

Types of Futures Commodity Futures -Sugar -Corn -OJ -Wheat-Soy beans -Pork bellies Financial Futures Tbills -Yen -GNMA -Stocks ...

Futures Contract Concepts Not an actual sale Always a winner & a loser (unlike stocks) K are “settled” every day. (Marked to ...

Ex - Settlement & Speculate Example - You are speculating in Hog Futures. You think that the Spot Price of hogs will rise in ...

Ex - Settlement & Speculate Example - You are speculating in Hog Futures. You think that the Spot Price of hogs will rise in ...

Commodity Hedge In June, farmer John Smith expects to harvest 10,000 bushels of corn during the month of August. In June, the Se ...

Commodity Hedge In June, farmer John Smith expects to harvest 10,000 bushels of corn during the month of August. In June, the Se ...

Commodity Hedge In June, farmer John Smith expects to harvest 10,000 bushels of corn during the month of August. In June, the Se ...

Commodity Hedge In June, farmer John Smith expects to harvest 10,000 bushels of corn during the month of August. In June, the Se ...

Commodity Speculation You have lived in NYC your whole life and are independently wealthy. You think you know everything there i ...

Commodity Speculation Nov: Short 3 May K (.4400 x 38,000 x 3 ) = + 50,160 Feb: Long 3 May K (.4850 x 38,000 x 3 ) = - 55,290 Los ...