Financial Derivatives in Corporate Finance: Managing Risk and Creating Value

Financial Derivatives in Corporate Finance: Managing Risk and Creating Value --- Financial derivatives play several important role in corporate finance: They can be used to hedge risks, they are the building blocks for analysis of corporate credit risk, and they serve as analytical tools to value corporate investment projects that have built-in flexibility, e.g., due to a multi-stage structure or timing options. In this course, we introduce the core principles that underlie the valuation and use of derivatives such as futures, swaps, options, and credit derivatives. We apply these ideas to a number of problems including hedging of interest-rate, foreign exchange, and commodity price risk, real options in investment decisions, and transfer of credit risk. With a focus on corporate value creation, we pay particular attention to potential misuses of derivatives and unintended consequences of corporate financial engineering in the face of financial market imperfections.