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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27085
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| Title: | Credit Enhancement Through Targeted Risk Managment: Freeport-McMoRan's
Gold-Dominated Depository Shares |
| Authors: | Chidambaran, N. K.
Fernando, Chitru S.
Spindt, Paul A. |
| Keywords: | Risk management
Gold-linked
Hybrid Securities |
| Issue Date: | Nov-1998 |
| Series/Report no.: | FIN-98-087 |
| Abstract: | In 1993 and early 1994, Freeport McMoRan Copper and Gold (FCX), a mining
company, issued two series of gold-denominated depositary shares to
raise 430 million dollars for expansion of their mining capacity in
Indonesia. We price the depositary shares using a term structure model
for the forward rates implied by gold futures and we show that FCX
successfully enhanced the credit quality of the issue. This credit
enhancement is achieved because the effect of linking the payoff of the
depositary shares to gold reduces default risk and is similar to
conventional risk management. The building of financing and risk
management, however, allows the firm to target hedging benefits only to
the newly issued securities. The design of the security overcomes the
asset substitution problem and credibly commits the firm to hedging. The
depositary shares issued by FCX illustrate how firms can enhance credit
quality through financial engineering without changing the existing
priority ordering of their capital structure. |
| URI: | http://hdl.handle.net/2451/27085 |
| Appears in Collections: | Finance Working Papers
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