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Corporate Finance
CORPORATE CORPORATEFINANCE FINANCE DECISONS DECISONS
INVESTMENT INVESTMENT
PORTFOLIO CAPITAL
FINANCING FINANCING
M&A
Giddy
Corporate Finance
CORPORATE CORPORATEFINANCE FINANCE DECISONS DECISONS
INVESTMENT
INVESTMENT INVESTMENT
PORTFOLIO CAPITAL M&A
FINANCING FINANCING
MEASUREMENT TOOLS
Direction
Giddy
A Typical Derivative
l
T.I. T.I.
COMPAQ COMPAQ
Commodities: Spot and Forward How can Cokes canners cap their can costs?
ALUMINUM PRICE per tonne n $1607.0
n $1584.5
SPOT
Copyright 2002 Ian H. Giddy
3 MONTHS
6 MONTHS
Financial Risk Management 6
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Commodity Prices
Simple model of a commodity futures price based on the cost of carry:
t F t = S0 (1 + Rt + Ct )
Ft = Futures price for delivery t years from today S0 = Spot price today Rt = Interest rate for t years Ct = Non-interest costs of carry.
Copyright 2002 Ian H. Giddy
t Ft = S0 (1 + Rt + Ct - CY )
Giddy
JPY
Sony Sony B Bof ofA A
Spot
Forward points
Giddy
Policies and Exchange Rate Regimes Exchange rate systems--fixed vs floating l Managed floating l EMU-type currency blocs l De facto blocs--the dollar
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Source: pacific.commerce.ubc.ca/xr
Copyright 2002 Ian H. Giddy
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Argentine Peso
Source: pacific.commerce.ubc.ca/xr
Copyright 2002 Ian H. Giddy
Euro
Source: pacific.commerce.ubc.ca/xr
Copyright 2002 Ian H. Giddy
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Domestic Policies, Domestic Prices and Interest Rates, and Exchange Rates
Country A DOMESTIC ECONOMIC POLICIES INFLATION RATE EXCHANGE RATE INTEREST RATE FORWARD RATE INTEREST RATE Country B DOMESTIC ECONOMIC POLICIES INFLATION RATE
MacParity
Source: economist.com
Copyright 2002 Ian H. Giddy
Giddy
How was the Dutch company Heineken affected by the fall in the Euro in 19992000? Look at
u The
Euro
1.2 1 0.8 0.6 0.4 0.2 0
10/18/1999
12/18/1999
10/18/2000
2/18/2000
4/18/2000
6/18/2000
8/18/2000
Giddy
How was the Dutch company Heineken Location Fixed Assets affected by the fall in The Netherlands2,341 the Euro in 1999- Rest of Europe 8,874 Western Hemisphere 1,972 2000? Africa 685 Asia Pacific 1,613 Look at 1548500%
u The
Sales 15% 57% 13% 4% 10% 100% 1,063 4,027 895 311 732 7,028 15% 57% 13% 4% 10% 100%
Euro Data: 1999 figures, millions of Euro Source: http://www.heinekencorp.nl u The companys sales u The companys production
How was the Dutch company Heineken affected by the fall in the Euro in 19992000? Look at
u The
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or
Derivatives? Derivatives? Debt? Debt?
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Over Change One Three Country night Day week Month month months US$ Libor* 1.78875 -0.027 -0.111 0.004 1.9 2.03 Euro Libor* 3.23375 0.223 -0.032 0.093 3.35 3.4 Libor* 4.66938 0.597 0.577 -0.025 4.1325 4.18813 Swiss Fr Libor* 1.6 -0.023 0.183 -0.025 1.65667 1.71667 Yen Libor* 0.05 0.1075 0.105 US$ CDs 1.86 1.96 Euro CDs 3.325 0.335 0.085 0.025 3.36 3.425
Source: ft.com ft.com Markets Home Bonds Data Links Money Rates
Copyright 2002 Ian H. Giddy
Direction
Giddy
Option Hedge
Petrobras hedging cost of Japanese debt
CALL OPTION ON YEN FORWARD CONTRACT
Option Hedge
Questions about options: n When should companies use them? n Which options? n How much do they cost? n Are they worth paying for?
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SELL
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PHOTOMASKS US DOLLARS
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Case Study: Photronics The company and its currency exposure l Income, cash flow and translation effects l The economic risks
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Photronics Photronics
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Photronics Photronics
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Translation Policy
The Company's subsidiaries in Europe and Singapore maintain their accounts in their respective local currencies. Assets and liabilities of such subs idiaries are translated to U.S. dollars at year-end exchange rates. Income and expenses are translated at average rates of exchange prevailing during the year. Foreign currency translation adjustments are accumulated in a separate component of shareholders' equity. The effects of changes in exchange rates on foreign currency transactions are included in income.
Economic Exposure
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Economic exposure is how the firms revenues and costs will respond to exchange rate changes.
u Example:
Even though Intel invoices German customers in marks, its future revenues may be unaffected by fluctuations in the mark if the currency of determination of prices in the semiconductor business is the dollar or even the yen.
The currency of determination is the currency in which most of the competition prices similar products.
Financial Risk Management 44
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sales
GBP?
n n n
PHOTOMASKS
USD?
DETERMINED BY COMPETITION
JPY?
Giddy
Hedge, or suffer translation gains & losses? How can its exposure be gauged? What does FAS 133 imply for a company like this? What tools should be used?
Fixed/floating:
u How
certain are the cash flows? Are operating profits linked to interest rates or inflation? currency of the assets: currency of denomination vs. currency of location vs. currency of determination. the assets short term or long term? Should the firm assume ease of refinancing, or buy an option on access to financing?
Currency:
u Consider
Maturity or availability:
u Are
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A Hedging Roadmap
Driven by company needs Company has economic exposure Company has natural hedge
Contact Info
Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 Ian.giddy@nyu.edu http://giddy.org