Use of Convertible and Warrant Bonds by Japanese Firms: Risk Shifting or Delayed Equity?

W. Carl  Kester

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Lecture | 13 Oct 1994

Use of Convertible and Warrant Bonds by Japanese Firms: Risk Shifting or Delayed Equity?

by W. Carl Kester

Keywords: Bonds; Risk and Uncertainty; Equity; Japan;

Language: English

Format: Print

Citation:

Kester, W. Carl. "Use of Convertible and Warrant Bonds by Japanese Firms: Risk Shifting or Delayed Equity?" In Complex Securities and Corporate Finance. Lecture at the Financial Management Association Annual Meeting, St. Louis, MO, October 13, 1994. (Discussant.)

About the Author

W. Carl Kester

George Fisher Baker Jr. Professor of Business Administration

Finance

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Maxum Petroleum, Inc.

W. Carl Kester

Maxum seeks an oil-price hedging strategy that yields substantial cash during oil price spikes, is affordable under ordinary circumstances, and is easily managed. It is striving to avoid a repeat of the challenging situation encountered in 2008 when spiking oil prices resulted in substantial working capital buildup, heavy draw down in its bank credit lines, and missed investment opportunities. Students must differentiate among the income statement, balance sheet and cash flow effects of Maxum's exposure to oil prices, and understand the payoff profiles of various option hedges such as call writing and buying, costless collars, and "ratio writing" (unequal combinations of puts and calls). They are also challenged to design a hedging program that supports Maxum's growth and investment strategy by yielding substantial cash primarily during extreme oil price increases; imposes low or no costs otherwise; and does not require active, judgmental trading decisions to execute.

Keywords: Hedging; options; commodities; Credit Derivatives and Swaps; Risk Management; Futures and Commodity Futures; Financial Strategy; Volatility;

Citation:
Kester, W. Carl. "Maxum Petroleum, Inc." Harvard Business School Spreadsheet Supplement 213-714, January 2013. (Revised April 2017.) View Details

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Use of Convertible and Warrant Bonds by Japanese Firms: Risk Shifting or Delayed Equity?

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