Corporates and Financial Engineering: A Few Case Studies

13 Pages Posted: 16 Apr 2013

See all articles by Antonie Kotze

Antonie Kotze

Financial Chaos Theory; Department of Finance and Investment Management

Date Written: October 15, 2005

Abstract

Corporates enter the financial markets as natural hedgers for their interest rate and/or foreign exchange exposures. Few companies, however, utilise the equity derivative markets to their advantage - to hedge certain corporate action events. In this exposé we will discuss three case studies to understand how equity derivatives are utilised by corporates to assists them in reaching their goals. In the first case study we will look at how Venfin used equity derivatives to fund a transaction. We will then turn to corporate warrants. In the second case study we will show how Richemont and Remgro used these instruments prudently to sell some of their tobacco interests. In the last case study we will turn to a transaction between UBS and LTCM. Here we will highlight the risks in using corporate warrants for the wrong reasons. Through the case studies we also learn that payoff diagrams are essential tools in understanding structured derivatives.

Keywords: Hedge, Foreign Exchange, LTCM, UBS, Black and Scholes, Option Pricing, Corporate action

JEL Classification: G12, G13, G14, G24, G34, G35

Suggested Citation

Kotze, Antonie, Corporates and Financial Engineering: A Few Case Studies (October 15, 2005). Available at SSRN: https://ssrn.com/abstract=2251445 or http://dx.doi.org/10.2139/ssrn.2251445

Antonie Kotze (Contact Author)

Financial Chaos Theory ( email )

PO Box 16185
Doornfontein, 2028
South Africa

HOME PAGE: http://www.quantonline.co.za/

Department of Finance and Investment Management ( email )

PO Box 524
Auckland Park
Johannesburg, Gauteng 2006
South Africa

HOME PAGE: http://www.uj.ac.za

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