Like many publicly traded companies, AT&T's risk management policy report is an interesting subject worthy of scrutiny. This paper will analyze AT&T's risk policy using the following risk management tools such as: the Black-Scholes Options Pricing Model, decision trees, simulation analysis, and hedging. The tools will be applied to AT&T's categories of corporate, economic, foreign currency, political, and other relevant global business risks.
AT&T Corporation uses various risk management tools to protect themselves from market risks, changes in interest, foreign exchange risks, and changes in equity prices. They use certain derivative financial instruments, including interest rate swaps, options, forwards, equity hedges, and other derivative contracts. According to their annual report, AT&T uses the Black-Scholes Options Pricing Model and hedging tools to maintain their risk management. There is no mention about decision trees or simulation analysis; however, these tools will be analyzed in this paper regardless.
In order to implement these risk management tools, the following five variables must be determined. The first one is the current price of the underlying stock options, which is actually the price of the shares of common stock. In AT&T's case, the price would be $21.06 per stock. The exercise price can be determined if all things are held constant, it is believed that the higher the exercise price, the lower the call option (Ross 234). It must be noted here that the call value can not be a negative regardless of the level of the exercise value. Currently, according to Yahoo, AT&T's exercise value is at $22.50. The expiration date is three months totaling to 90 days. Their annual interest rate (discount rate) is at 3.6% according to Yahoo finance, and their volatility rate is at 55.99%.
