Content

The course consists of 2 separate modules, corporate risk management and corporate applications of option techniques:

Corporate risk management

Firms act in a risky business environment. Understanding the risks that (non-financial) corporates face is critical in assessing its risk exposures and to determine the appropriate actions that can be considered in order to manage these risks. In this part, we first review the types of risk and discuss why risk management matter. We subsequently examine the approaches and financial instruments for handling various (financial) risk exposures, including foreign exchange, interest rate, and counterparty credit risk. The practical relevance will be illustrated by means of exercises, real-life examples and business case(s).

By the end of the course, the student has (i) a sound oversight of the various risk sources faced by firms and is able to (ii) identify & analyze its risk exposures and (iii) propose adequate solutions to manage and mitigate these (financial) risk exposures.

Depending on the subject to be discussed, students may have to prepare the interactive lecture (e.g. introductory texts, exercises, …). Slides and other study material will be made available electronically (Toledo). This ex-ante list of contents is conditional to changes during the academic year.

Corporate applications of option techniques
The use of option techniques in a corporate environment allow for a better understanding of risk related behaviour by important stakeholders (managers, shareholders, employees,…) of the company. It also enables decision makers to incorporate the value of operational as well as financial (in)flexibility into their project evaluation. As such, it complements more traditional corporate finance (valuation) techniques.

In contrast to traditional tools as static discounted cash flow analysis, real options analysis is an approach to managerial decision making that always assumes that managers maximize the market value of projects and they use all the available information when making decisions, in particular when managing projects that involve dynamic and state contingent choices among alternatives (options), such as, expanding/reducing manufacturing capacity, investing in new products or technology, suspending production, and mothballing a plant. The resulting valuation and managerial decisions can thus be very different when real options analysis is used rather than static discounted cash flow analysis.

The course provides the student with a set of essential tools for understanding and applying (real) options techniques to corporate problems. In particular, the course:

• Addresses how to deal with uncertainty of innovative corporate projects where the “unknown unknowns” are more important than  the “known unknowns”
• Provides insights in how to recognize operational and financial flexibility in real life corporate decisions and value it accordingly using (real)option techniques.
• will help understanding and explaining the risk behavior of and conflicts between all actors in the corporate environment.
• Focusses on the importance of financial derivatives (options, warrants, convertible debt,…) in corporate financial decision making and applies it to real life corporate examples

Course material

Compulsory course material

• Handouts from our sessions (Toledo)
• Research papers (Toledo)
• Cass studies and real life examples (Toledo)

Recommended Course Material

(only as extra background reading material): Multinational business finance : David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, Ed. 11 or higher

Format: more information

To be able to successfully take this course, students should actively participate during the sessions. In addition, students have to read, understand and think critically about the financial research papers and corporate case studies used in class.