The Business of Hedging

Rocket-science is not a prerequisite of hedging. You don't even need a trading or financial background to be able to learn how to put the principles into good practice. The concepts and many of the executions of hedging are surprisingly simple,

Starting with the fundamentals, The Business of Hedging is a systematic and clearly explained tour of financial risk management. It describes the various forms of risk, such as interest rate risk, foreign exchange risk, and commodity price risk, and show how these can have adverse effects on your business. It reviews the different tools available to neutralise these, including forwards, swaps, futures and options, and illustrates how best to apply them to everyday business. It also shows the strategies used by top companies around the world over the last century and a half, and describes how you can use the same techniques within your own company.

The Business of Hedging counteracts the fact that as the derivatives industry becomes more specialised and esoteric it is bypassing the very people that it can be of most benefit to. It provides a simple understanding of risk management and will enable you to put the right structure in place to not only ensure the survival of your own business but also guarantee its continued growth and prosperity.

• Part One: Foundations of Hedging Financial Risk
• Chapter One: The Background to Hedging
• Why Hedging is Your Business
• Identifying Risks in an Enterprise
• Managing Risk and Hedging Risk
• Conclusion
• Chapter Two: The fundamentals
• The Nature of a Financial Hedge
• Essential Elements of a Financial Hedge
• The Need to Measure Risk
• Volatility as a Measure of Risk
• Measuring the Value at Risk (VAR)
• Hedgeable Risk
• The Three Risks of the Apocalypse
• The Price of Money
• Commodity Price Risk
• Systemic Risk
• Part Two: The Tools of Financial Hedging
• Chapter Three: The Derivatives
• Know Your Tools
• The Fundamentals of Derivatives
• Over-the-Counter Derivatives (OTCs)
• Exchange-Traded Derivatives
• Chapter Four: Financial Swaps
• Background
• The Subject Matter of a Financial Swap
• The Basic Structure of Swaps
• The Risk in Interest Rate Swaps
• Types of Interest Rate Swaps
• Basic Currency Swaps
• Cross-Currency Coupon Swap
• The Cross-Currency Basis Swap
• Complex Currency Swap Types
• Commodity Swaps
• Equity Index Swaps
• Master Agreements and the ISDA
• Flexibility of Swaps
• Chapter Five: Financial Options
• Background
• The Universal Principles of Options
• Option Pricing
• Time Value of an Option
• The Greeks
• Exercising an Option
• Profit and Loss at Option Expiration
• Option Multiple Exercise Constructs — Caps and Floors
• The Risk of the Parties to Options
• Chapter Six: Commodity Futures
• Background
• Some Basic Features of Futures Contracts
• The Three Innovations of the Futures Contract
• The Minimum Standard Terms and Conditions
• Contract Negotiability or On-Sellability
• The Elimination of Credit Risk
• Pricing the Futures
• The Basis
• Chapter Seven: Option on Futures
• Background
• Option Standardization
• Option Classification
• Selling Options on Futures
• Chapter Eight: Derivatives Risk
• Basis Risk
• Credit Risk
• Legal Risk
• Operational Risk
• Part Three: The Business of Hedging
• Chapter Nine: Laying the Groundwork
• Background
• Analyzing the Risk
• Selecting the Right Hedging Tool
• Meeting the Risk Criteria
• Meeting Your Business Criteria
• Chapter Ten: Hedging the Price of Money
• Background
• Analyzing Money Price Risk — Additional Factors
• Using Swaps
• The Zero-Sum Objection
• Using OTC Options
• The Strike Rate and the Option Premium
• Using Futures
• Interest Rate Futures
• Currency Futures
• Using Options on Futures
• Chapter Eleven: Hedging Commodity and Systemic Risks
• Background
• Hedging Commodities
• Hedging Systemic Risk
• Hedging Creatively
• Conclusion

A good introduction to hedging (if you dare).