The Value Of Instruments With Intermediate And Long Maturities

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

Financial hedging is the use of hedging instruments - typically FX forwards, options and swaps - that are sold by foreign exchange brokers and banks to reduce company exposure to currency fluctuations. (Export Development Canada, 2016) Acknowledging that foreign exchange risk is a real threat to corporate cash flows, assets and expenses can be one of the biggest hurdles for most companies. However, recognizing the importance of protecting assets companies can move forward in identifying the type and magnitude of the risk to implement strategies to mitigate them. The three most common types of foreign exchange risks are:

TD Bank expectation for interest rate risk is to ensure that earnings are stable and predictable over time (TD 2014, 86). The bank adopted a disciplined hedging approach to manage the net interest income from assets and liabilities. The key aspects of this approach are as follows, “evaluating and managing the impact of rising or falling interest rates on net interest income and economic value, and developing strategies to manage overall sensitivity to rates across varying interest rate scenarios, measuring the contribution of each TD product on a risk-adjusted, fully-hedged basis, including the impact of financial options such as mortgage commitments that are granted to customers and, developing and implementing strategies to stabilize net interest income from all retail banking products (TD 2014, 86). “The bank becomes exposed to interest rate risk when their assets and liability principal and interest cash flows have different interest payments or maturity dates” (TD 2014, 86). This is called mismatched positions

1. Decreased sales volumes of Due Bills has a detrimental effect on the bank’s overall profitability. Metro, the division responsible for up to 85% of sales of Due Bills not only lack incentives to sell Due Bills; they have incentives not to sell Due Bills due to:

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

This discourages consumers and businesses from taking loans, and instead save money, as shown by the contraction in demand for money in Fig 1.1 from Q1 to Q2. This will lead to less money being circulated in the economy, with lower consumption and a contraction in investment by businesses, as shown in Fig 1.2. AD will therefore decrease and shift to the left from AD1 to AD2, shown in Fig 1.3, as consumption and investments are amongst the determinants for AD. With a left shift in AD, a new equilibrium point is established at B with a lower price level (APL2) and lower economic growth (Y2).

Air Canada is faced with many different kinds of risks such as fuel price risk, foreign exchange risk and interest rate risk through the use of various financial derivative instruments. Under its risk management policy, Air Canada uses these instruments solely for the risk management purposes, not to generate trading profits. Any change in cash flows associated with the derivative instruments is designed to be offset by changes in cash flows of the relevant risks being hedged.

Through the investigate of the management of the Banc One, it had a large sum of the derivatives, which aimed to offset the interest rate exposure. Commonly the typical U.S banks would like to match the maturity of the assets with the maturity

The duration of a bond is used as an approximation to measure a bond’s price sensitivity to interest rate changes. There are two main methods used by investors; the Macaulay duration and the modified duration. The Macaulay duration based on the calculations made is at 5.921, showing that Dana Holding has moderate sensitivity to the changes in interest rates. This can be interpreted by stating that it takes 5.921 years for bond investors to recover their initial investments. Thus, this puts Dana Holding’s bonds as moderately risky compared to the market norm. This can be supported by the fact that Dana Holdings has 15 period payments left before maturity, which is less than 7.5 years. Since bond duration decreases with shorter length, the bond

economy. What happens to money and credit affects interest rates and the performance of the

It can change the interest rate on money that it lends to banks. A higher interest rate makes money more expensive. Banks may be, therefore, more reluctant to sign loans to applicants. On the other hand, the Bank by lowering interest rates can encourage banks to more readily lend loans.

Purchasing options, forward, or future contracts. In this way the bank can reduce the uncertainty in the future by entering into an agreement with set terms for a specific date. Thus, if the interest rate moves in an unfavorable direction, the bank has the option to use these tools in order to mitigate the impact of the change on its balance sheet.

Bank customers were negatively affected through harder to get loan, falling value of housing market, tight regulation, higher taxation and cut in public expenditures. However, the benefit is that bank

Aggregate Growth Rates. Low or declining aggregate growth rates often weaken the debt-servicing capacity of domestic borrowers and contribute to increasing credit risk. Recessions have preceded many episodes of systemic financial distress.