1
Q
Risk management strategies
A
- External Risk: Currency risk Interest rate risk Market risk Inflation risk
-Internal risk Liquidity risk Credit risk Refinancing risk Regulatory or legal risk
2
Q
Interest rate risk
A
Mitigate:
- Match duration, term and interest basis
- Enter into forward rates
- Interest rate swaps, caps and floors, collars
3
Q
Refinancing risk
possibility that an individual or company would not be able to replace a debt obligation with new debt at a critical time for the borrower
A
- Avoid concentrating the refinancing of loans and bonds -spread maturities
- Ensure that sources of finance are widely distributed
4
Q
Liquidity risk
A
- Hold on to cash resources or unused banking facilities
- Use cash flow budgets
5
Q
Credit risk
A
- Make use of aging analysis of trade receivables
- Use credit agencies
- Avoid concentration exposure
6
Q
Market and commodity price risk
A
- Use futures, forwards, swaps and options to manage commodity price risk for inputs
- Use natural hedge for outputs
7
Q
Forwards and futures
A
- Legal contract between two parties
- Price agreed today for a forward price
- Always a winner and loser
8
Q
Option contracts
A
- Gives owner right not obligation
- Premium paid immediately, exercise price on expiry
American: Option holder can exercise at any time up to expiry date
European: Option holder can only exercise on expiry date and not at any time before
9
Q
Contract for Difference (CFD)
A
- Essentially a future contract
- Margin deposit-price derived from an asset
- May be subject to counterparty risk
- Interest payments made, dividends received
- Floors to limit downside, but close
- Asset securitisation
