Link Technologies Case Report

1288 Words6 Pages
Amulya Gattu, Hanny Gomez, Tamta Kavtaradze, Sandra Vargas Amulya Gattu, Hanny Gomez, Tamta Kavtaradze, Sandra Vargas Link Technologies Case Analysis Link Technologies Case Analysis Link Technologies Case Report The derivatives program was reducing risk when the firm was investing in foreign currency futures for the first four months from the implementation date (February 1991 to May 1991). This is seen by the negative correlation of (0.94226594) between the derivative (futures) cash flow and the unhedged cash flow. A purpose of a perfect hedge is to obtain a net of zero or in other words, reduce your risk to nothing not including the cost of the hedge. If a correlation is negative, as it was for the first three…show more content…
This can be seen through the positive correlation of 0.59601630 from the use of options contracts from May 1991. Also, the overall correlation is effected and yields a correlation of 0.18316670 which indicates that the hedging program was not applied to minimize risk. This is further supported by the fact that the variance of the unhedged cash flow is smaller than the variance of the hedged cash flow as shown in the below table. Options Variance | | Unhedged CF | 7,660,828,949.06 | Hedged CF | 37,023,798,317.69 | Difference | (29,362,969,368.63) | | | Overall Variance | | Unhedged CF | 10,292,387,271.33 | Hedged CF | 33,529,561,494.82 | Difference | (23,237,174,223.49) | Ms. Cohen’s argument was irrelevant because not only did she provide any supportive facts, but she is also incorrect because the hedging program did not create any new risks. In fact, it was perfectly implemented since it reduced the firm’s foreign currency fluctuation risk as seen above. Mr. Lee and the other executives expect to generate a higher profit from hedging since they have majority of their personal wealth invested into the firm. The focus of any hedging program should always be to minimize the firm’s risk of loss, but that does not mean the they will
Open Document