Open for an additional touch of creativity? Derivatives may constitute “synthetic equity”. Bottom-line, your bank just wants somebody else to take the first loss. The amount of required equity is based on risk assessments. Less risk ⇒ less equity.
Let’s take a small utility plant situated near an urban area. It purchases coal and sells electricity to consumers. Local electricity demand is inelastic and sales prices are regulated/stable. Operating cost of the plant are fixed. The core risk? An unexpected surge of coal prices on the world market. One solution might be to conclude a Coal Electricity Swap which hedges the coal purchase prices by linking them to the electricity sales prices. Your operating risk decreases substantially (which is a blessing in itself) and your bank may very well require less equity.
Call us if you want to open a new window on the world. To start, we offer a stimulating discussion with changing paradigms which will long be memorized…
Contact & Location
Beacon | Twinkling Financial Concepts
11, Maria Louiselaan
1412 AE Naarden
Tel: +31 (6) 23367666