Chapter 20 - Financing with derivatives. This chapter examines the characteristics and valuation of options and option-related financing. It explores the concepts necessary to evaluate the impact that decisions to issue or purchase these type of securities have on shareholder wealth. | 20 Financing with Derivatives Introduction This chapter examines the characteristics and valuation of options and option-related financing. It explores the concepts necessary to evaluate the impact that decisions to issue or purchase these type of securities have on shareholder wealth. Classes of Derivatives: Securities Options are one of two important classes of so-called derivative securities – that is, securities whose value is derived from another asset. Another important class of derivative securities is forward-type contracts, such as futures contracts and forward contracts. Swaps are another important class of derivative securities. Options Short-Term options Convertible fixed-income securities Warrants Rights offering Options: Short-Term Options Short-term options on common stocks, stock market indexes (., Standard & Poor’s 500 index), 30-year Treasury bonds (., interest rate options), and foreign currency options (., on the British pound and Japanese yen). These options are traded on organized exchanges, such as the Chicago Mercantile Exchange and the Chicago Board Options Exchange. Options: Convertible Fixed-Income Securities Convertible fixed-income securities, such as debentures or preferred stocks, that may be exchanged for the company’s common stock at the holder’s option. By giving the fixed-income security holder an opportunity to share in any increase in its common stock value, the firm is able to reduce potential conflicts between the fixed-income security holders and stockholders, resulting in lower agency costs. Options: Warrants Warrants, which are options issued by a company to purchase shares of the company’s common stock at a particular price during a specified period of time. Warrants are frequently sold to investors as part of a unit that consists of a fixed-income security with a warrant attached. As a result, warrants are issued by firms for similar reasons as convertible securities. Options: Rights Offering A rights offering . | 20 Financing with Derivatives Introduction This chapter examines the characteristics and valuation of options and option-related financing. It explores the concepts necessary to evaluate the impact that decisions to issue or purchase these type of securities have on shareholder wealth. Classes of Derivatives: Securities Options are one of two important classes of so-called derivative securities – that is, securities whose value is derived from another asset. Another important class of derivative securities is forward-type contracts, such as futures contracts and forward contracts. Swaps are another important class of derivative securities. Options Short-Term options Convertible fixed-income securities Warrants Rights offering Options: Short-Term Options Short-term options on common stocks, stock market indexes (., Standard & Poor’s 500 index), 30-year Treasury bonds (., interest rate options), and foreign currency options (., on the British pound and Japanese yen). These .
