4.0 Introduction

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From the course by The University of Melbourne

Corporate Financial Decision-Making for Value Creation

253 ratings

The University of Melbourne

Corporate Financial Decision-Making for Value Creation

253 ratings

Course 3 of 5 in the Specialization Essentials of Corporate Finance

In this course, participants will learn about the key financial decisions modern corporations face, as well as the alternative methods that can be employed to optimize the value of the firm’s assets. This is part of a Specialization in corporate finance created in partnership between the University of Melbourne and Bank of New York Mellon (BNY Mellon).

From the lesson

Alternative Approaches to Risk Management

In the final week of this course we define and demonstrate the use of different derivative securities in risk management including; forwards, futures and option contracts. We explain the key drivers of option values and explain how options might be combined to provide different payoff structures. We conclude by considering how risk management might create value for shareholders.

4.0 Introduction2:52

4.1 Using Forwards and Futures to Manage Risk9:46

4.2 Introducing Options11:15

4.3 The Drivers of Option Values11:17

4.4 Caps, Floors and Collars3:55

4.5 Why Manage Risk?10:57

Meet the Instructors

Paul Kofman
Dean, Faculty of Business and Economics
Sidney Myer Chair of Commerce
Sean Pinder
Associate Professor
Faculty of Business and Economics

Welcome to Module 4 of the course, Corporate Financial Decision-Making for

Value Creation, where we will define, demonstrate, and

then justify alternative approaches to risk management by modern corporations.

So far in this course, we've dealt with three key decisions that senior financial

managers face on a day to day basis.

Firstly, we considered the internal investment decision, and

how firms might optimally select projects for

investment from the different proposals generated internally, within the firm.

Next, we considered how firms might pay for that investment, and specifically,

the role of IPOs, and the impact of debt on the returns required by and

generated for shareholders.

In our last module together, we considered the role of external investment

by the market for mergers and acquisitions.

This then transitioned to a discussion of the value benefits that could be achieved

by unlocking the diversification discount by corporate restructuring.

And now we shift our focus to the last of the big questions facing management.

Should we manage the risk of the firms cash flows, and if so what instruments and

markets are available to us?

The motivation for this module is easily established by a quick flick through

the annual report of any modern day corporation.

For example, consider this excerpt from Kellogg's 2014 Annual Report, where

the company clearly identifies different sources of risk to its cash flows and

then identifies the different instruments that it uses to manage those risks.

The structure of this module will be as follows.

Firstly, we'll consider how corporations might manage risk

by locking in prices using forward contracts for future execution, but

highlight some of the dangers such contracts expose counterparties to,

and how the development of futures markets addresses many of those shortcomings.

Our focus will then shift toward the style of contract and that enables a hedger to

reduce downside risk while keeping the upside of beneficial price movements alive

with the discussion of the role of options contracts.

We'll then survey the main drivers of the value of these contracts,

highlighting the important role of volatility and option valuation.

In our fourth session together we'll look at how different option contracts can be

combined with positions in the underlying asset in such a way as to create payoff

structures that match the risk appetite of the firm through the use of caps,

floors and collars.

Finally having developed a fairly comprehensive

armory of alternative derivative securities, we'll answer the question

how does risk management actually create value for our share holders?

I have no doubt that you'll find this module both interesting and

ultimately rewarding.

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