Credit Enhancement Through Financial Engineering: Freeport-Mcmoran's Gold-Denominated Depositary Shares

Posted: 1 Oct 2001

See all articles by N.K. Chidambaran

N.K. Chidambaran

Fordham University - Gabelli School of Business

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Paul A. Spindt

Tulane University - A.B. Freeman School of Business

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Abstract

In 1993 and 1994, Freeport McMoRan Copper and Gold issued two series of gold-denominated depositary shares to finance the expansion of its mining capacity in Indonesia. The pricing of these securities reflected their enhanced credit quality, which arose from the positive correlation between the value of the firm and the value of the securities. This feature of the securities effectively bundles a gold hedge with financing. A bundled hedge avoids wealth transfers to senior bondholders, since junior bondholders can effectively net their bond-related claims on the firm against their hedge-related liability to the firm. Such securities cannot be replicated by conventional hedging strategies, and they also mitigate the asset substitution problem.

Keywords: Risk management, Credit Enhancement, Gold-Linked, Hybrid Securities

JEL Classification: G32, G13

Suggested Citation

Chidambaran, N.K. and Fernando, Chitru S. and Spindt, Paul A., Credit Enhancement Through Financial Engineering: Freeport-Mcmoran's Gold-Denominated Depositary Shares. Journal of Financial Economics, May/June 2001. Available at SSRN: https://ssrn.com/abstract=285520

N.K. Chidambaran (Contact Author)

Fordham University - Gabelli School of Business ( email )

United States

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Paul A. Spindt

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5413 (Phone)

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