Credit Enhancement Through Targeted Risk Managment: Freeport-Mcmoran's Gold-Dominated Depository Shares
43 Pages Posted: 11 Nov 2008
Date Written: November 1998
Abstract
In 1993 and early 1994, Freeport McMoRan Copper and Gold (FCX), a mining company, issued two series of gold-denominated depositary shares to raise 430 million dollars for expansion of their mining capacity in Indonesia. We price the depositary shares using a term structure model for the forward rates implied by gold futures and we show that FCX successfully enhanced the credit quality of the issue. This credit enhancement is achieved because the effect of linking the payoff of the depositary shares to gold reduces default risk and is similar to conventional risk management. The building of financing and risk management, however, allows the firm to target hedging benefits only to the newly issued securities. The design of the security overcomes the asset substitution problem and credibly commits the firm to hedging. The depositary shares issued by FCX illustrate how firms can enhance credit quality through financial engineering without changing the existing priority ordering of their capital structure.
Keywords: Risk management, Gold-linked, Hybrid Securities
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Risk Management: Coordinating Corporate Investment and Financing Policies
By Kenneth Froot, David S. Scharfstein, ...
-
Why Firms Use Currency Derivatives
By Christopher Geczy, Bernadette A. Minton, ...
-
The Use of Foreign Currency Derivatives and Firm Market Value
By George Allayannis and James Weston
-
Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives
By George Allayannis and Eli Ofek
-
Do Firms Hedge in Response to Tax Incentives?
By John R. Graham and Daniel A. Rogers
-
How Much Do Firms Hedge with Derivatives?
By Wayne R. Guay and S.p. Kothari
-
How Much Do Firms Hedge with Derivatives?
By Wayne R. Guay and S.p. Kothari
-
By John M. Griffin and René M. Stulz