© 2000 John Petroff
|
|
© 2000 John Petroff |
Swaps are but one form of hedging techniques. Options, derivatives, futures and forward contracts (which were defined in Chapter 3 and illustrated in Chapter 4) are some of the instruments available to reduce or avoid interest rate, maturity and currency exposure. For instance, the exporter of airplanes in the previous example has several other strategies available. He could buy a Yen future on the futures exchange. He can enter into a forward contract with a commercial bank. He could also borrow the Yen equivalent of $100 million from a Japanese bank, convert it into dollars and buy US marketable securities with the $100 million today. All of these strategies involve different costs and steps; the least costly would be the swap, but it is rarely a prefect hedge, as we noted.
Notes to financial statements regularly include comments on hedging techniques used by corporations. An analyst should look for these indications of financial sophistication. But the same tools that reduce risk can also be used for speculation. The funds handled by many corporations provide for opportunities to generate additional revenues, but that should not be a reason for putting corporate assets at risk.
See review questions Q-12G4.1 through Q-12G4.5
| Previous: 3-Swaps |
|
Next: Pro forma liabilities and equity |