International Corporate Finance Chp 8:Foreign currency derivatives Xin Chen Visiting Associate Professor Aarhus School of Business
1 International Corporate Finance Chp 8: Foreign currency derivatives Xin Chen Visiting Associate Professor Aarhus School of Business
What is a Derivative A derivative is a financial instrument whose value today or at some future date is derived entirely from the value of another asset,known as the underlying asset. Counterparty risk (exchange traded futures and options are settled through clearing house) 袋 Widely used for two very distinct management objectives: Speculation-use of derivative instruments to take a position in the expectation of a profit Hedging-use of derivative instruments to reduce the risks associated with the everyday management of corporate cash flow
What is a Derivative A derivative is a financial instrument whose value today or at some future date is derived entirely from the value of another asset, known as the underlying asset. Counterparty risk (exchange traded futures and options are settled through clearing house) Widely used for two very distinct management objectives: Speculation – use of derivative instruments to take a position in the expectation of a profit Hedging – use of derivative instruments to reduce the risks associated with the everyday management of corporate cash flow
Benefits to use derivatives Permit firms to achieve payoffs that they would not be able to achieve without derivatives,or could achieve only at greater cost 图 Hedge risks that otherwise would not be possible to hedge 图 Make underlying markets more efficient Reduce volatility of stock returns 图 Minimize earnings volatility Reduce tax liabilities Motivate management (agency theory effect)
Benefits to use derivatives Permit firms to achieve payoffs that they would not be able to achieve without derivatives, or could achieve only at greater cost Hedge risks that otherwise would not be possible to hedge Make underlying markets more efficient Reduce volatility of stock returns Minimize earnings volatility Reduce tax liabilities Motivate management (agency theory effect)
Benefits to use derivatives Permit firms to achieve payoffs that they would not be able to achieve without derivatives,or could achieve only at greater cost 图 Hedge risks that otherwise would not be possible to hedge 图 Make underlying markets more efficient Reduce volatility of stock returns 图 Minimize earnings volatility Reduce tax liabilities Motivate management (agency theory effect)
Benefits to use derivatives Permit firms to achieve payoffs that they would not be able to achieve without derivatives, or could achieve only at greater cost Hedge risks that otherwise would not be possible to hedge Make underlying markets more efficient Reduce volatility of stock returns Minimize earnings volatility Reduce tax liabilities Motivate management (agency theory effect)
Forward A forward contract represents the obligation to buy (sell)a security or commodity at a pre-specified price, known as the forward price,at some future date. At maturity the agent with the long position pays the forward price to agent with the short position,who then delivers the underlying asset. --No up-front payment (value of the contract is zero on the issue) --Everything is settled at maturity
Forward A forward contract represents the obligation to buy (sell) a security or commodity at a pre-specified price, known as the forward price, at some future date. At maturity the agent with the long position pays the forward price to agent with the short position, who then delivers the underlying asset. --No up-front payment (value of the contract is zero on the issue) --Everything is settled at maturity