Contents

Reducing Risk Exposure 783 Hedging Short-Run Exposure 784 Cash Flow Hedging: A Cautionary Note 785 Hedging Long-Term Exposure 786 Conclusion 786

23.3 Hedging with Forward Contracts 787 Forward Contracts: The Basics 787 The Payoff Profile 788

Hedging with Forwards 788 A Caveat 788 Credit Risk 789

Forward Contracts in Practice 790

23.4 Hedging with Futures Contracts 790

Trading in Futures 790 Futures Exchanges 791 Hedging with Futures 791

23.5 Hedging with Swap Contracts 793

Currency Swaps 793

Interest Rate Swaps 794

Commodity Swaps 794

The Swap Dealer 794

Interest Rate Swaps: An Example 795

23.6 Hedging with Option Contracts 796

Option Terminology 796 Options versus Forwards 797 Option Payoff Profiles 797 Option Hedging 797

Hedging Commodity Price Risk with Options 797 Hedging Exchange Rate Risk with Options 800 Hedging Interest Rate Risk with Options 800 A Preliminary Note 800 Interest Rate Caps 800 Other Interest Rate Options 800

23.7 Summary and Conclusions 801

24.4 Valuation of Equity and Debt in a Leveraged Firm 825

Valuing the Equity in a Leveraged Firm 826 Options and the Valuation of Risky Bonds 827

24.5 Options and Corporate Decisions: Some Applications 829

Mergers and Diversification 829 Options and Capital Budgeting 831

24.6 Summary and Conclusions 833

Chapter 25

Mergers and Acquisitions

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