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Putting It Together:
Derivative Structuring To Benefit All Parties

Sean Brady, managing director at Credit Suisse First Boston, is a master of the art of the deal. In his case, the deal is derivative structuring. Traditionally a derivative is defined as a financial instrument that derives its value from that of an underlying asset (as another security) or from the value of a rate (as of interest or currency exchange) or index of asset value (as a stock index). Futures contracts, forward contracts, options, and swaps are the most common types of derivatives.

Brady says that the value of derivatives is determined by two components: financing costs and exposure. Whoever implicitly "owns" the exposure to an asset, whether through a derivative or any other means, is implicitly paying the financing cost of the portion of exposure he or she owns. He notes that this is always the case, regardless of the complexity of the transactions giving rise to the exposure. The valuation of derivatives, like the valuation of the common equity of a company, is a balance of exposure benefit (due to leverage and volatility) and financing costs, which are higher with less equity and more volatility because of the higher probability of loss by the debt holders.

"You can use derivatives to bridge markets," he said. In one example, European investors were interested in a US energy company but that company wasn't interested in being a part of a complex deal. Brady and his team at Credit Suisse First Boston, however, offered a solution that gave both parties what they were seeking. "What we do each day is determine how to help companies."

The final speaker in the spring MSF Speaker Series, Sean Brady has a BA in the history of science and a law degree, both from Harvard. His start in the finance industry came through his legal work with Cleary Gottlieb Steen & Hamilton, an international law firm. He has been with Credit Suisse First Boston, a leading global investment banking and financial services firm. for more than ten years.

--Ginny Hudak-David
April 2005