Docsity
Log inSign up
Docsity
Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity

Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan

Guidelines and tips
Guidelines and tips
Sell on Docsity
Sell on Docsity
Log inSign up

Prepare for your exams

Study with the several resources on Docsity

Find documents

Prepare for your exams with the study notes shared by other students like you on Docsity

Search Store documents

The best documents sold by students who completed their studies

Search through all study resources
Docsity AINEW

Summarize your documents, ask them questions, convert them into quizzes and concept maps

Explore questions

Clear up your doubts by reading the answers to questions asked by your fellow students

Earn points to download

Earn points by helping other students or get them with a premium plan

Share documents
download point icon20 Points

For each uploaded document

Answer questions
download point icon5 Points

For each given answer (max 1 per day)

All the ways to get free points
Get points immediately

Choose a premium plan with all the points you need

Study Opportunities

Choose your next study program

Get in touch with the best universities in the world. Search through thousands of universities and official partners

Community

Ask the community

Ask the community for help and clear up your study doubts

University Rankings

Discover the best universities in your country according to Docsity users

Free resources

Our save-the-student-ebooks!

Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors

From our blog

Exams and Study
Go to the blog

Notes on finance, Thesis of Financial Management

Fakir Mohan UniversityFinancial Management

details of financial derivatives

Typology: Thesis

2015/2016

Uploaded on 08/01/2016

sabir_mohammad
sabir_mohammad 🇮🇳

1 document

1 / 4

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
Corporate restructuring is a corporate action taken to significantly modify the structure or the operations
of the company. This usually happens when a company is facing significant problems and is in financial
jeopardy. Often, the restructuring is referred to the ways to reduce the size of the company and make it
small. Corporate restructuring is essential to eliminate all the financial troubles and improve the
performance of the company.
The troubled company’s management hire legal and financial experts to assist and advise in the
negotiations and the transaction deals. The company can go as far as appointing a new CEO specifically
for making the controversial and difficult decisions to save or restructure the company. Generally, the
company may look at debt financing, operations reduction and sale of the company’s portions to
interested investors.
Reasons for Corporate Restructuring:
Corporate restructuring is implemented under the following scenarios:
Change in the Strategy: The management of the troubled company attempts to improve the company’s
performance by eliminating certain subsidiaries or divisions which do not align with the core focus of the
company. The division may not seem to fit strategically with the long-term vision of the company. Thus,
the company decides to focus on its core strategy and sell such assets to the buyers that can use them
more effectively.
Lack of Profits: The division may not be profitable enough to cover the firm’s cost of capital and cause
economic losses to the firm. The poor performance of the division may be the result of the management
making a wrong decision to start the division or the decline in the profitability of the division due to the
increasing costs or changing customer needs.
Reverse Synergy: This concept is in contrast to the M&A principles of synergy, where a combined unit is
worth more than the individual parts together. According to reverse synergy, the individual parts may be
worth more than the combined unit. This is a common reasoning for divesting the assets. The company
may decide that more value can be unlocked from a division by divesting it off to a third party rather than
owning it.
Cash Flow Requirement: A sale of the division can help in creating a considerable cash inflow for the
company. If the company is facing some difficulty in obtaining finance, selling an asset is a quick
approach to raising money and reduce debt.
Methods to Divest Assets:
There are various ways in which a company can reduce its size. The following are the methods by which
a company separates a division from its operations:
Divestitures: Under divestitures, a company sells, liquidates or spins off a subsidiary or a division.
Generally, a direct sale of the divisions of the company to an outside buyer is the norm in divestitures.
The selling company gets compensated in cash and the control of the division is transferred to the new
buyer.
Equity Carve-outs: Under equity carve-outs, a new and independent company is created by diluting the
equity interest in the division and selling it to outside shareholders. The new subsidiary’s shares are issued
pf3
pf4

Partial preview of the text

Download Notes on finance and more Thesis Financial Management in PDF only on Docsity!

Corporate restructuring is a corporate action taken to significantly modify the structure or the operations

of the company. This usually happens when a company is facing significant problems and is in financial

jeopardy. Often, the restructuring is referred to the ways to reduce the size of the company and make it

small. Corporate restructuring is essential to eliminate all the financial troubles and improve the

performance of the company.

The troubled company’s management hire legal and financial experts to assist and advise in the

negotiations and the transaction deals. The company can go as far as appointing a new CEO specifically

for making the controversial and difficult decisions to save or restructure the company. Generally, the

company may look at debt financing, operations reduction and sale of the company’s portions to

interested investors.

Reasons for Corporate Restructuring:

Corporate restructuring is implemented under the following scenarios:

Change in the Strategy: The management of the troubled company attempts to improve the company’s

performance by eliminating certain subsidiaries or divisions which do not align with the core focus of the

company. The division may not seem to fit strategically with the long-term vision of the company. Thus,

the company decides to focus on its core strategy and sell such assets to the buyers that can use them

more effectively.

Lack of Profits: The division may not be profitable enough to cover the firm’s cost of capital and cause

economic losses to the firm. The poor performance of the division may be the result of the management

making a wrong decision to start the division or the decline in the profitability of the division due to the

increasing costs or changing customer needs.

Reverse Synergy: This concept is in contrast to the M&A principles of synergy, where a combined unit is

worth more than the individual parts together. According to reverse synergy, the individual parts may be

worth more than the combined unit. This is a common reasoning for divesting the assets. The company

may decide that more value can be unlocked from a division by divesting it off to a third party rather than

owning it.

Cash Flow Requirement: A sale of the division can help in creating a considerable cash inflow for the

company. If the company is facing some difficulty in obtaining finance, selling an asset is a quick

approach to raising money and reduce debt.

Methods to Divest Assets:

There are various ways in which a company can reduce its size. The following are the methods by which

a company separates a division from its operations:

Divestitures: Under divestitures, a company sells, liquidates or spins off a subsidiary or a division.

Generally, a direct sale of the divisions of the company to an outside buyer is the norm in divestitures.

The selling company gets compensated in cash and the control of the division is transferred to the new

buyer.

Equity Carve-outs: Under equity carve-outs, a new and independent company is created by diluting the

equity interest in the division and selling it to outside shareholders. The new subsidiary’s shares are issued

in a general public offering and the new subsidiary becomes a different legal entity with its operations and

management separated from the original company.

Spin-offs: Under spin-offs, the company creates an independent company distinct from the original

company as done in equity carve-outs. The major difference is that there is no public offering of the

shares, instead, the shares are distributed among the company’s existing shareholders proportionately.

This translates into the same shareholder base as the original company, with the operations and

management totally separate. Since the stocks of the new subsidiary are distributed to its own

shareholders, the company is not compensated by cash in this transaction.

Split-offs: Under split-offs, the shareholders receive new stocks of the subsidiary of the company in trade

for their existing stocks in the company. The reasoning here is that the shareholders are letting go of their

ownership in the company to receive the stocks of the new subsidiary.

Liquidation: Under liquidation, a company is broken apart and the assets or the divisions are sold piece by

piece. Generally, liquidations are linked to bankruptcies.

Conclusion:

Corporate restructuring allows the company to continue to operate in some way. The management of the

company tries all the possible measures to keep the entity going on. Even when the worst happens and the

company is forced to pieces because of the financial troubles, the hope remains that the divested pieces

can function good enough for a buyer to acquire the diminished company and take it back to profitability.

FINANCIAL DERIVATIVES

Derivatives are instruments to manage financial risks. Since risk is an inherent part of any investment,

financial markets devised derivatives as their own version of managing financial risk. Derivatives are

structured as contracts and derive their returns from other financial instruments.

Types of Derivatives

Derivative contracts can be differentiated into several types. All the derivative contracts are created and traded in two distinct financial markets, and hence are categorized as following based on the markets:

  • Exchange Traded Contract: Exchange traded contracts trade on a derivatives facility that is organized and referred to as an exchange. These contracts have standard features and terms, with no customization allowed and are backed by a clearinghouse.
  • Over The Counter Contract: Over the counter (OTC) contracts are those transactions that are created by both buyers and sellers anywhere else. Such contracts are unregulated and may carry the default risk for the contract owner.

Derivative Categories

Generally, the derivatives are classified into two broad categories:

  • Forward Commitments
  • Contingent Claims

Contingent claims are contracts in which the payoff depends on the occurrence of a certain

event. Unlike forward commitments where the contract is bound to be settled on or before the

termination date, contingent claims are legally obliged to settle the contract only when a specific

event occurs. Contingent claims are also categorized into OTC and exchange-traded contracts,

depending on the type of contract. The contingent claims are further sub-divided into the

following types of derivatives:

• Options: Options are the type of contingent claims that are dependent on the price of the

stock at a future date. Unlike the forward commitments derivatives where payoffs are calculated keeping the movement of the price in mind, the options have payoffs only if the price of the stock crosses a certain threshold. Options are of two types: Call and Put. A call option gives the option to buy the underlying asset at a specific price. A put option is the option to sell the underlying at a certain price.

• Interest Rate Options: Options where the underlying is not a physical asset or a stock, but

the interest rates.

• Warrants: Warrants are the options which have a maturity period of more than one year and

hence, are called long-dated options. These are mostly OTC derivatives.

• Convertible Bonds: Convertible bonds are the type of contingent claims that gives the

bondholder an option to participate in the capital gains caused by the upward movement in the stock price of the company, without any obligation to share the losses.

• Callable Bonds: Callable bonds provide an option to the issuer to completely pay off the bonds

before their maturity.

• Asset-Backed Securities: Asset-backed securities are also a type of contingent claim as they contain an

option feature, which is the prepayment option available to the asset owners.

• Options on Futures: A type of options that are based on the futures contracts.

• Exotic Options: These are the advanced versions of the standard options, having more complex

features.

In addition to the categorization of derivatives on the basis of payoffs, they are also sub-divided on the basis of their underlying asset. Since a derivative will always have an underlying asset, it is common to categorize derivatives on the basis of the asset. Equity derivatives, weather derivatives, interest rate derivatives, commodity derivatives, exchange derivatives, etc are the most popular ones that derive their name from the asset they are based on. There are also credit derivatives where the underlying is the credit risk of the investor or the government.

Derivatives take their inspiration from the history of mankind. Agreements and contracts have been used from ages to execute commercial transactions and so is the case with derivatives. Likewise, financial derivatives have also become more important and complex to execute smooth financial transactions. This makes it important to understand the basic characteristics and the type of derivatives available to the players in the financial market.