Finance School of Management Chapter 11: Hedging and Insuring Obiective Explain market mechanisms for Implementing hedges and insurance uesTc
1 Finance School of Management Chapter 11: Hedging and Insuring Objective Explain market mechanisms for implementing hedges and insurance
Finance School of Management Chapter 11 Contents 11. 1 Using Forward Futures 11.6 Basic Features of Contracts to Hedge risks Insurance Contracts 11.2 Hedging Foreign 1.7 Financial Guarantees Exchange Risk with Swap Contracts 1. 8 Caps floors on 11.3 Hedging Shortfall-Risk by Interest rates Matching Assets to 11.9 Options as Insurance Liabilities 11.10 The Diversification 11. 4 Minimizing the Cost of Principle Hedging 1111 Insuring a diversified 11.5 Insuring versus Hedging Portfolio uesTc
2 Finance School of Management Chapter 11 Contents 11.1 Using Forward & Futures Contracts to Hedge Risks 11.2 Hedging Foreign- Exchange Risk with Swap Contracts 11.3 Hedging Shortfall-Risk by Matching Assets to Liabilities 11.4 Minimizing the Cost of Hedging 11.5 Insuring versus Hedging 11.6 Basic Features of Insurance Contracts 11.7 Financial Guarantees 11.8 Caps & Floors on Interest Rates 11.9 Options as Insurance 11.10 The Diversification Principle 11.11 Insuring a Diversified Portfolio
Finance School of Management Example of a Forward Contracts Planning a trip from In either case, payment Boston to Tokyo a will not take place until year from now the day of flight You make your flight In entering the forward reservation now contract you eliminate You can either lock in the risk of the airfare a price of$1,000 by going above $1,000 committing now or But wait to do nothing uesTc
3 Finance School of Management Example of a Forward Contracts v Planning a trip from Boston to Tokyo a year from now v You make your flight reservation now v You can either lock in a price of $1,000 by committing now or wait to do nothing v In either case, payment will not take place until the day of flight v In entering the forward contract you eliminate the risk of the airfare going above $1,000 v But …
Finance School of Management Forward Contracts Any time two parties agree to exchange some item in the future at a prearranged price, they are entering into a forward contract 6 No money is paid in the present by either party to the other uesTc 4
4 Finance School of Management Forward Contracts v No money is paid in the present by either party to the other
Finance School of Management Terminology Forward price e Spot price Face value The party that has agreed to buy has what is termed a long position The party that has agreed to sell has what is termed a short position uesTc
5 Finance School of Management Terminology v The party that has agreed to buy has what is termed a v The party that has agreed to sell has what is termed a