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The Derivatives Market in the World of Corporate Finance

Derivatives are legal contracts that set the terms of a transaction that can be bought and sold as the current market price varies against the terms in the contract. Originally, derivatives were all about [more…]

What Are Options in the World of Corporate Finance?

Options in corporate finance are contracts that give the buyer the right to buy or sell a fixed number of goods at a predetermined price, but they don’t obligate the buyer to do so. [more…]

Customize Contracts with Forwards

A forward in the world of corporate finance is an agreement between parties to perform a sale of a specific type of good in a predetermined quantity at a predetermined price at a predetermined date in [more…]

Add Some Standardization to Contracts with Futures

Futures contracts are highly standardized in a number of ways: futures contracts must be for a homogenous commodity of a standardized type and quality; each futures contract must be for a standardized [more…]

Swap Derivatives and Their Role in Corporate Finance

Of the four most common derivatives, the swap is easily the most confusing. Why? Because each swap involves two agreements rather than just one. Swaps occur when corporations agree to exchange something [more…]

Interest Rate Risk and Inflation Risk in Corporate Finance

The vast majority of products available for investment that yield interest offer fixed rate returns. A fixed rate returnmeans that if you purchase an investment that offers a 1 percent annual interest [more…]

Minimize Your Company's Market Risk

Your company is careful. It chooses only the best customers, only the best investments, uses derivatives only to mitigate potential losses, diversifies clients and investments, and does everything right [more…]

Evaluate the Risk of Extending Credit

Credit is a form of loan. Corporations frequently provide their goods or services to customers on credit, which means that they expect to get paid at some later date. Extending credit is common for furniture [more…]

Identify Operating Risk Associated with Your Business

Operating risk, or operational risk, is the risk of losses or costs associated with business operations. According to the Basel Accords on banking supervision, this category includes just about every possible [more…]

Take a Look at Your Company's Liquidity Risk

If your company is owed money but doesn't have enough to pay the bills in the meantime, you’re a victim of liquidity risk! The most extreme form of liquidity risk, called [more…]

Portfolio Management Strategies for Your Corporation

The buying, selling, and trading of investments within a portfolio optimizing the returns of the portfolio by managing which investments the portfolio holds — is considered [more…]

The Trade-Off between Risk and Return for Your Portfolio

According to modern portfolio theory, there’s a trade-off between risk and return. All other factors being equal, if a particular investment incurs a higher risk of financial loss for prospective investors [more…]

Diversify Your Portfolio to Maximize Returns and Minimize Risk

Because the risk of a single investment can’t be totally eliminated, corporations attempt to reduce the risk of a portfolio by picking investments that are likely to change in value in different ways or [more…]

How to Measure Your Portfolio's Risk

Exactly how risk is measured is a complicated issue. Before you can begin managing a portfolio you have to look at individual investments. Originally, this task was done using a calculation called the [more…]

Risk Aversion in Corporate Finance

There are certain risks that no amount of diversification can eliminate. Specific risk is any risk associated with an individual investment and holds the possibility of being eliminated or greatly minimized [more…]

What Is Financial Engineering?

Financial engineering is nothing more than the creation of new and interesting financial tools, often accomplished through the use of mathematic modeling and computer engineering. Financial engineering [more…]

How to Make Securities Out of Just about Anything

When people talk about securities, more frequently than not they’re referring to equity securities, also known as stocks. Equity securities aren’t even close to being the only type of security out there [more…]

Hybrid Finances and Corporate Finance

A hybrid is anything that is made by combining two or more things. The idea is simple: Take two financial products and smush them together into a single product. Some work more effectively together than [more…]

What Does It Mean to Bundle Assets?

When several of a single type of asset or, sometimes, several different types of assets are grouped together and sold collectively as a single security, that’s called [more…]

Appeal to a Large Market with Exotic Finances

Exotic financial products aren’t entirely new; rather, they’re new and/or rare variations of existing products. The word exotic is used in finance in the sense that something is attractive simply because [more…]

Engineering Corporate Finances

Portfolio engineering and investing strategy go hand-in-hand and are easily the most mathematically complicated subject in all of financial engineering. As Isaac Newton pointed out, modeling the madness [more…]

Computational Finance

The most significant trend in the manner in which financial transactions take place and the financial implications of this change comes from an overlap between financial engineering and computer engineering [more…]

How to Measure the Cost of Capital the WACC Way

The most common method of measuring the cost of capital that you’ll see in all the major college finance textbooks is called WACC (pronounced “whack”), the weighted average cost of capital. This particular [more…]

How to Calculate the Cost of Debt

Calculating the cost of debt is pretty simple. Debt includes any long- or short-term debt that is used to finance the operations of a business.

The biggest influence on the cost of debt is simply the interest [more…]

The Cost of Equity

The cost of equity is a little less singular than the cost of debt. Equity is any funding raised through the selling of stock. Different people have different ways of measuring equity. [more…]

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