Hedge.lu - User contributions [en-gb]

Main Page

2018-06-05T09:57:19Z

Hector:

== Introduction ==
Hedge.lu is a resource website aimed at providing relevant finance cases & academic articles to professionals, academics, and students. Using the insights provided by past finance cases and key academic articles is a great strength that may enable one to win an argument about a financial topic, make a convincing case about a strategy, or enrich a finance training with captivating examples.

The name "Hedge.lu" comes from two independent reasons and motives: the first one is that this domain was unused, whereas it looks and sounds great. The other half of the explanation is that most of the finance cases which have had a large impact on how we run a firm today from a financial standpoint involved huge failures in hedging programs. That makes [http://hedge.lu Hedge.lu] the perfect place to talk about such things!

Find out more in the [[About]] page.

== Finance Cases ==
{| class="wikitable sortable" border="1"
|-
! Title
! Firm Involved
! Year
! Keywords
|-
| [[When a lack of hedging leads to ruin]]
| Slite
| 1992
| SEK, DEM, Currency, Hedging
|-
| [[Disguised speculation]]
| American Barrick
| 1993
| Hedging, Derivatives, Oil
|-
| [[Matching cash flows and the importance of accounting]]
| Metallgesellschaft
| 1993
| Hedging, Derivatives, Oil
|-
| [[The appropriateness of hedging instruments]]
| PacifiCorp
| 1997
| Hedging, Currency, Forwards, Options
|-
| [[The dangers of leverage]]
| LTCM
| 1998
| Convergence, Crisis, Volatility, Hedge fund
|-
| [[The costs of a flawed hedging program]]
| Ashanti Goldfield
| 1999
| Hedging, Gold, Speculation
|-
| [[When hedging becomes speculation]]
| Air Products and Chemicals
| 2000
| Hedging, Currency, Forwards, Options
|-
| [[M&A integration and CEO hubris]]
| Worldcom
| 2002
| M&A, Synergies, Integration, Governance
|-
| [[When price deviation never corrects]]
| Amaranth Advisors
| 2006
| Futures, Calendar arbitrage, Natural gas
|-
| [[How not to insider trade]]
| Millenium
| 2008
| Options, Insider trading
|-
| [[Picking pennies in front of a steamroller]]
| AIG
| 2008
| CDS, Subprimes, Crisis, Bailout, insurance
|-
| [[How to spot Ponzi schemes]]
| Madoff
| 2008
| Hedge funds, Due diligence, Fund of fund, Feeder fund
|-
| [[Derivative's documentation matters]]
| Codere
| 2013
| CDS, Credit risk, prospectus, ISDA
|-
| [[The importance of getting dividends right]]
| Virtu Financial
| 2014
| Corporate actions, Dividends, Accounting, HFT
|-
| [[Listing a Chinese business in the US]]
| Alibaba
| 2014
| Listing, IPO, China, Foreign entities, Governance
|-
| [[How short-sellers cleanse financial markets]]
| Gowex
| 2014
| Short Selling, Accounting Fraud
|-
| [[The impact of cultural heritage on governance]]
| Toshiba
| 2015
| Corporate governance, Top-down pressure, Accounting, Scandal
|-
| [[Creating value by splitting businesses]]
| Paypal
| 2015
| Spinoff, Activist investor
|-
| [[Dividend tax arbitrage]]
| Commerzbank
| 2016
| dividends, Tax, Arbitrage, Securities lending
|-
| [[The reach of US law & Bond covenants]]
| Elliott Capital Management
| 2016
| Pari passu, Bonds, Argentina, Hedge funds, Covenants
|-
| [[HFT Thrive off complexity]]
| IEX
| 2016
| Stock Exchange, Speed bump, Market structure, HFT
|-
| [[The Economic rationale behind spinoffs]]
| Yahoo
| 2016
| Spinoff, Investment, Participation
|-
| [[Broker prices are unreliable]]
| Saba Capital Management
| 2017
| Broker prices, Fair value, IFRS 13, Corporate bonds
|-
| [[The dangers of inappropriate goal setting]]
| Wells Fargo
| 2017
| Corporate governance, Goal setting, Incentives
|-
| [[The riskiness of volatility products]]
| Credit Suisse
| 2018
| Volatility, ETN, ETF, VIX, XIV
|}

== Finance Articles ==
{| class="wikitable sortable" border="1"
|-
! Title
! Authors
! Publication Year
! Keywords
|-
| [[The dog and the frisbee]]
| Haldane, Madouros
| 2012
| Finance theory, Regulation, Complexity
|-
| [[Do Private Equity Funds Manipulate Reported Returns?]]
| Brown, Gredil, Kaplan
| 2016
| Private Equity, Window dressing, Reporting
|-
| [[Cloaked Trading]]
| Cohen, Lau, Malloy
| 2016
| Asset Management, Window dressing, Reporting
|-
| [[Fake Alpha]]
| Müller, Rosenberger, Uhrig-Homburg
| 2017
| Active management, Alpha, Managerial skill, Factor investing
|-
| [[Replicating Anomalies]]
| Hou, Xue, Zhang
| 2017
| Market Efficiency, Market Anomalies, Arbitrage
|-
| [[When learners escape models of their behavior]]
| Whitmore
| 2017
| Regulation, Modelling, Risk management
|}

Derivative's documentation matters

2018-06-05T09:55:23Z

Hector: Created page with "== Firms Involved == * Codere SA * GSO Capital Partners (Blackstone Group) == Year of the event == 2013 == Description of the case == Codere SA is a Spanish gaming company...."

== Firms Involved ==
* Codere SA
* GSO Capital Partners (Blackstone Group)

== Year of the event ==
2013

== Description of the case ==
Codere SA is a Spanish gaming company. Blackstone's GSO, lead by Akshay Shah<ref>[https://www.ft.com/content/5e23e516-5cdc-11e8-ad91-e01af256df68 "The mystery trader who roiled Wall Street", Financial Times, 2018-06-05]</ref> fund bought CDS on the firm, and then went on to propose cheap financing to Codere, with the condition that they delay the payment of a coupon on existing bonds by a few days, hence briefly defaulting and triggering the CDS which GSO owned<ref>[https://www.bloomberg.com/view/articles/2013-12-05/blackstone-made-money-on-credit-default-swaps-with-this-one-weird-trick "Blackstone made money on CDS with this one weird trick", Matt Levine, Bloomberg, 2013-12-05]</ref>.
This trade was widely criticized as the writers of the CDS found the default to be manufactured and artificial, and that CDS were not meant to be used like this and shouldn't have been triggered. The trade was nonetheless legal and went through, making a handsome payout to GSO.

== Take-aways ==
* Derivative instruments don't behave as we want them to. They behave as described in their documentation: prospectuses and ISDA rules. A deep understanding of these details can provide an edge and yield profit.
* CDS are primarily hedging instruments: using them for other purposes, for example "naked" speculation, requires extra dilligence to ensure that one only gains exposure to the factors or risks desired.

== References ==
<references />

Main Page

2018-06-05T09:38:37Z

Hector:

== Introduction ==
Hedge.lu is a resource website aimed at providing relevant finance cases & academic articles to professionals, academics, and students. Using the insights provided by past finance cases and key academic articles is a great strength that may enable one to win an argument about a financial topic, make a convincing case about a strategy, or enrich a finance training with captivating examples.

The name "Hedge.lu" comes from two independent reasons and motives: the first one is that this domain was unused, whereas it looks and sounds great. The other half of the explanation is that most of the finance cases which have had a large impact on how we run a firm today from a financial standpoint involved huge failures in hedging programs. That makes [http://hedge.lu Hedge.lu] the perfect place to talk about such things!

Find out more in the [[About]] page.

== Finance Cases ==
{| class="wikitable sortable" border="1"
|-
! Title
! Firm Involved
! Year
! Keywords
|-
| [[When a lack of hedging leads to ruin]]
| Slite
| 1992
| SEK, DEM, Currency, Hedging
|-
| [[Disguised speculation]]
| American Barrick
| 1993
| Hedging, Derivatives, Oil
|-
| [[Matching cash flows and the importance of accounting]]
| Metallgesellschaft
| 1993
| Hedging, Derivatives, Oil
|-
| [[The appropriateness of hedging instruments]]
| PacifiCorp
| 1997
| Hedging, Currency, Forwards, Options
|-
| [[The dangers of leverage]]
| LTCM
| 1998
| Convergence, Crisis, Volatility, Hedge fund
|-
| [[The costs of a flawed hedging program]]
| Ashanti Goldfield
| 1999
| Hedging, Gold, Speculation
|-
| [[When hedging becomes speculation]]
| Air Products and Chemicals
| 2000
| Hedging, Currency, Forwards, Options
|-
| [[M&A integration and CEO hubris]]
| Worldcom
| 2002
| M&A, Synergies, Integration, Governance
|-
| [[When price deviation never corrects]]
| Amaranth Advisors
| 2006
| Futures, Calendar arbitrage, Natural gas
|-
| [[How not to insider trade]]
| Millenium
| 2008
| Options, Insider trading
|-
| [[Picking pennies in front of a steamroller]]
| AIG
| 2008
| CDS, Subprimes, Crisis, Bailout, insurance
|-
| [[How to spot Ponzi schemes]]
| Madoff
| 2008
| Hedge funds, Due diligence, Fund of fund, Feeder fund
|-
| [[The importance of getting dividends right]]
| Virtu Financial
| 2014
| Corporate actions, Dividends, Accounting, HFT
|-
| [[Listing a Chinese business in the US]]
| Alibaba
| 2014
| Listing, IPO, China, Foreign entities, Governance
|-
| [[How short-sellers cleanse financial markets]]
| Gowex
| 2014
| Short Selling, Accounting Fraud
|-
| [[The impact of cultural heritage on governance]]
| Toshiba
| 2015
| Corporate governance, Top-down pressure, Accounting, Scandal
|-
| [[Creating value by splitting businesses]]
| Paypal
| 2015
| Spinoff, Activist investor
|-
| [[Dividend tax arbitrage]]
| Commerzbank
| 2016
| dividends, Tax, Arbitrage, Securities lending
|-
| [[The reach of US law & Bond covenants]]
| Elliott Capital Management
| 2016
| Pari passu, Bonds, Argentina, Hedge funds, Covenants
|-
| [[HFT Thrive off complexity]]
| IEX
| 2016
| Stock Exchange, Speed bump, Market structure, HFT
|-
| [[The Economic rationale behind spinoffs]]
| Yahoo
| 2016
| Spinoff, Investment, Participation
|-
| [[Broker prices are unreliable]]
| Saba Capital Management
| 2017
| Broker prices, Fair value, IFRS 13, Corporate bonds
|-
| [[The dangers of inappropriate goal setting]]
| Wells Fargo
| 2017
| Corporate governance, Goal setting, Incentives
|-
| [[The riskiness of volatility products]]
| Credit Suisse
| 2018
| Volatility, ETN, ETF, VIX, XIV
|-
| [[Derivative's documentation matters]]
| Hovnanian
| 2018
| CDS, Credit risk, prospectus, ISDA
|}

== Finance Articles ==
{| class="wikitable sortable" border="1"
|-
! Title
! Authors
! Publication Year
! Keywords
|-
| [[The dog and the frisbee]]
| Haldane, Madouros
| 2012
| Finance theory, Regulation, Complexity
|-
| [[Do Private Equity Funds Manipulate Reported Returns?]]
| Brown, Gredil, Kaplan
| 2016
| Private Equity, Window dressing, Reporting
|-
| [[Cloaked Trading]]
| Cohen, Lau, Malloy
| 2016
| Asset Management, Window dressing, Reporting
|-
| [[Fake Alpha]]
| Müller, Rosenberger, Uhrig-Homburg
| 2017
| Active management, Alpha, Managerial skill, Factor investing
|-
| [[Replicating Anomalies]]
| Hou, Xue, Zhang
| 2017
| Market Efficiency, Market Anomalies, Arbitrage
|-
| [[When learners escape models of their behavior]]
| Whitmore
| 2017
| Regulation, Modelling, Risk management
|}

The riskiness of volatility products

2018-02-13T20:45:13Z

Hector:

== Firms Involved ==
* Credit Suisse

== Year of the event ==
January 2018

== Description of the case ==
On Monday 5th of January 2018, the volatility of US equities, as measured by the VIX<ref>[http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index CBOE, VIX description page]</ref>, skyrocketed by 116%. This caused some serious issues on instruments designed to allow investors to bet against an increase of volatility. In particular, the VIX, and exchange-traded note (ETN), lost 93% of its value. Credit Suisse consequentially shut down the ETN on the next day<ref>[https://www.credit-suisse.com/corporate/en/articles/media-releases/credit-suisse-announces-event-acceleration-xiv-etn-201802.html Credit Suisse, Press release, ''Credit Suisse AG Announces Event Acceleration of its XIV ETNs'']</ref>, in accordance with the prospectus which allowed the issuer to do so in case of daily variation of more than 20%. This instrument was available to retail investors, even though its structure, covenants and risk profile were highly complex to apprehend.

In addition, huge intraday tracking error made the instrument exceptionally inefficient at replicating such a bet, in particular throughout Monday 5th<ref>[https://www.bloomberg.com/view/articles/2018-02-09/inverse-volatility-products-almost-worked Bloomberg, Matt Levine, ''Inverse Volatility Products Almost Worked'']</ref>. This was caused by the calculation method of the instrument, which relied on the prices of several futures on VIX with various maturities and not on the actual current VIX level<ref>[http://app.velocitysharesetns.com/files/prospectus/CS_VIX_VelocityShares_ETN_Amended_Final_Pricing_Supplement_AR48_long_form_2.PDF Credit Suisse, ''XIV Prospectus'']</ref>.

== Take-aways ==
* Selecting the right instrument to place a bet is key. For that, prospectus need to be read. The working of the instrument used needs to be thoroughly understood.
* In undertaking any kind of bet, beware of the tail risk (black swans).

== References ==
<references />

2017-07-03T17:12:25Z

Hector: Created page with "== Authors of the Article == * Marcel Müller, ''Chair of Financial Engineering and Derivatives, Karlsruhe Institute of Technology (KIT)'' * Tobias Rosenberger, ''Chair of Fin..."

== Authors of the Article ==
* Marcel Müller, ''Chair of Financial Engineering and Derivatives, Karlsruhe Institute of Technology (KIT)''
* Tobias Rosenberger, ''Chair of Financial Engineering and Derivatives, Karlsruhe Institute of Technology (KIT)''
* Marliese Uhrig-Homburg, ''Chair of Financial Engineering and Derivatives, Karlsruhe Institute of Technology (KIT)''

== Publication Year ==
2017

== Take-aways ==
* Investors misinterpret the skill of active funds managers, and thus tend to accept the negative aggregate returns provided by the active management funds industry
* In particular, investors fail to properly quantify the risks related to factor investing, and hence are baited by ''Fake Alpha'' strategies, for which they overpay

== Quotes ==
<blockquote>''"investors would still provide flows to the funds in the long-run equilibrium even if the managers didn’t have any skill at all, since they confuse skill with risk premia on omitted factors"''</blockquote>

<blockquote>''"Investors tremendously overinvest into active managed mutual equity funds. (...) We estimate that the US equity active mutual fund industry is too large by about 23% of its actual size. (...) This means that within 2014 $21.9 billion would have been falsely paid by investors of active managed US mutual funds to their managers."''</blockquote>

== References ==
* [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2899722 Müller, Rosenberger & Uhrig-Homburg, ''Fake Alpha'']

Do Private Equity Funds Manipulate Reported Returns?

2017-07-03T16:52:12Z

Hector:

== Authors of the Article ==
* Gregory W. Brown, ''University of North Carolina at Chapel Hill, Kenan-Flagler Business School''
* Oleg Gredil, ''Tulane University Freeman School of Business''
* Steven N. Kaplan, ''University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER)''

== Publication Year ==
2016

== Take-aways ==
* Private equity funds managers have an incentive to overstate their performance before raising new funds
* Underperforming fund managers do overstate their performance
* This does not seem to be successful as these managers are less likely than their peers to raise new funds
* In opposite, overperforming fund managers are conservatives as they want to avoid being perceived as exaggerating their performances

== Quotes ==
<blockquote>''"Some GPs of poorly performing funds appear to overstate NAVs around the time they would be attempting to raise a follow-on fund"''</blockquote>

<blockquote>''"We also find evidence of conservatism in valuations among the best performing funds. This is consistent with a concern on the part of GPs about being wrongly labeled as a firm that exaggerates NAVs."''</blockquote>

<blockquote>''"LPs do not assume the interim performance reports are unbiased; they punish GPs for the appearance of overstated performance by not providing capital to subsequent funds"''</blockquote>

== References ==
* [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2271690 Brown, Gredil & Kaplan, ''Do Private Equity Funds Manipulate Reported Returns?'']

2017-06-24T19:16:50Z

Hector: Created page with "== Firms Involved == * Long Term Capital Management (LTCM) == Year of the event == 1998 == Description of the case == LTCM was a hedge fund founded by John Meriwether, who p..."

The costs of a flawed hedging program

2017-06-24T16:13:08Z

Hector: Created page with "== Firms Involved == * Ashanti Goldfields Company == Year of the event == 1999 == Description of the case == Ashanti Goldfields was one of the largest African gold producers..."

== Firms Involved ==
* Ashanti Goldfields Company

== Year of the event ==
1999

== Description of the case ==
Ashanti Goldfields was one of the largest African gold producers. It had a successful hedging program in the 1990's, when it used forwards to protect itself against declining gold prices. However, in summer 1997, Ashanti sold forward 10 million ounces of gold, or 6 years of the firm's production and 38% of its reserves. In 1999, the European Central Banks announced that they would limit their sales of gold to maintain their reserves (in particular versus the Pound's), pushing the gold price sharply. Ashanti immediately faced $300m margin calls and made an unrealized loss of $600m<ref>[http://www.economist.com/node/325644 The Economist, ''Gold Hedging - Bugs'']</ref><ref>[http://www.ghanaweb.com/GhanaHomePage/NewsArchive/ASHANTI-A-Hedge-Too-Far-21933 GhanaWeb, ''ASHANTI: A Hedge Too Far'']</ref>. This spurred a liquidity crisis, forcing Ashanti to renegotiate its long-term credit, and sending its share price down the abyss.

== Take-aways ==
* A hedging program must not only consider macroeconomics but also anticipate liquidity issues and cash flow risks, as to not induce financial distress.

== References ==
<references />

The appropriateness of hedging instruments

2017-06-24T16:01:14Z

Hector: Created page with "== Firms Involved == * PacifiCorp * The Energy Group == Year of the event == 1997 == Description of the case == In June 1997, PacifiCorp, a US electric power company, made a..."

== Firms Involved ==
* PacifiCorp
* The Energy Group

== Year of the event ==
1997

== Description of the case ==
In June 1997, PacifiCorp, a US electric power company, made a tender offer to purchase the UK company The Energy Group for an amount of $9.6bn (or GBP8.20 per share), in cash. To comply with the UK Takeover Code, PacifiCorp bought call options on GBP to hedge part of the transaction. Considering the favorable condition of forwards, PacifiCorp later converted the options into FxForwards. In August 1997, the deal was halted by the Monopolies and Mergers Commission. PacifiCorp abandonned the transactions, and hence had to realize the gains or losses related to the forwards purchased to hedge the transaction. It posted an USD86m loss<ref>[http://www.prnewswire.com/news-releases/pacificorp-will-end-its-pursuit-of-the-energy-group-77691722.html PacifiCorp Will End Its Pursuit of The Energy Group]</ref> related to this aborted transactions, of which USD65m related to the termination of the forwards.

== Take-aways ==
* The choice of instruments is essential to a hedging program. IF the event is uncertain or has optionality embedded to it, then forwards can prove very hurtful.
* The goals of an hedge must be precisely defined: trying to take advantage of markets conditions is in most cases speculation, not hedging.

== References ==
<references />

Disguised speculation

2017-06-24T15:42:03Z

Hector:

== Firms Involved ==
* American Barrick

== Year of the event ==
1993

== Description of the case ==
Barrick American (today Barrick Gold) is a North American mining company. It became famous for its hedging program set up in the 90s, which heavily used Spot deferred contracts (SDCs). SDCs are similar to forward in the way that they define a delivery quantity, date and price at time t=0. At maturity T, the supplier has the option to roll-forward the contract at a premium or proceed to the delivery. In effect, this contract permits the firm to roll-forward losses while realizing gains immediately, increasing progressively the liabilities of the firm when the gold price is going up. American Barrick ended up winding down its positions in 2009, posting a $5.4 billion loss<ref>[http://www.metro.us/news/barrick-gold-posts-us5-4-billion-net-loss-on-windup-of-gold-hedging-program/tmWijD---34drHI4T1Pkzg Metro, ''Barrick Gold posts US$5.4 billion net loss on windup of gold hedging program'']</ref><ref>[http://barrick.q4cdn.com/808035602/files/doc_financials/2009/Quarterly%20Reports/Barrick-2009-Third-Quarter-Report_v001_f40j90.pdf Barrick Gold, ''Barrick Reports Q3 Results'']</ref>.

== Take-aways ==
* One should only hedge if there are spill-over effects and externalities affecting positively the projects or assets of the company. Allowing hedging otherwise results in a perverse incentive for the firm and in an inappropriate allocation of capital.
* Unrealized losses cannot be postponed forever, and will one day be realized.

== References ==
<references />

Disguised speculation

2017-06-24T15:33:43Z

Hector: Created page with "== Firms Involved == * American Barrick == Year of the event == 1993 == Description of the case == Barrick American (today Barrick Gold) is a North American mining company...."

== Firms Involved ==
* American Barrick

== Year of the event ==
1993

== Description of the case ==
Barrick American (today Barrick Gold) is a North American mining company. It became famous for its hedging program set up in the 90s, which heavily used Spot deferred contracts (SDCs). SDCs are similar to forward in the way that they define a delivery quantity, date and price at time t=0. At maturity T, the supplier has the option to roll-forward the contract at a premium or proceed to the delivery. In effect, this contract permits the firm to roll-forward losses while realizing gains immediately, increasing progressively the liabilities of the firm when the gold price is going up. American Barrick ended up winding down its position in the mid-2000s, posting a several billion loss.

== Take-aways ==
* One should only hedge if there are spill-over effects and externalities affecting positively the projects or assets of the company. Allowing hedging otherwise results in a perverse incentive for the firm and in an inappropriate allocation of capital.
* Unrealized losses cannot be postponed forever, and will one day be realized.

== References ==
<references />

The importance of getting dividends right

2017-06-24T15:26:24Z

Hector:

== Firms Involved ==
* Virtu Financial

== Year of the event ==
2010

== Description of the case ==
Virtu Financial is a High-Frequency Trading house, which deploys complex algorithms to trade stocks and other assets in the US. Full of brilliant PhD, Virtu has an almost immaculate track record. Almost, as Virtu did loose money on one day between 2009 and 2014<ref>[https://www.sec.gov/Archives/edgar/data/1592386/000104746915001003/g857380.jpg SEC Filing of Virtu Financial]</ref>. The computers of the firm missed a special dividend, resulting in a few millions of dollars of loss<ref>[https://www.bloomberg.com/news/features/2016-08-11/virtu-never-loses-well-almost-never-in-quest-to-upend-markets Bloomberg, ''Virtu Never Loses (Well, Almost Never)'']</ref>.

== Take-aways ==
* Missing corporate actions can have dire consequences, or at the very least tarnish one's track record.

== References ==
<references />

When a lack of hedging leads to ruin

2017-06-24T15:05:08Z

Hector:

== Firms Involved ==
* Renderi AB Slite
* Meyer Werft

== Year of the event ==
1992

== Description of the case ==
Slite was a Swedish shipping company running a ferry line between Sweden and Finland. It had ordered a new ship built by the German company Meyer Werft and was supposed to take delivery of it, and hence proceed to the payment in 1992. When it had ordered the ship, Slite had decided not to hedge the transaction. Indeed, the DEM and the SEK were both members of the European Monetary System, and were both moving within the "monetary serpent". The volatility of the two currency was thus very small. However, the SEK was unpegged from the DEM in September 1992, leading the SEK to lose 30% to the DEM. The price of the ship to be received had just been increased by 30%. Slite could not afford this price, and went bankrupt in 1993.

== Take-aways ==
* Hedging is there to protect from large deviations: it helps make a company antifragile, ie. immune to black swans<ref>[http://www.fooledbyrandomness.com/ Nassim Nicholas Taleb's website]</ref>.
* When there is a risk of ruin, one must be ready to engage in costly hedging programs. They actually increase the value of the company by reducing or eliminating the costs associated to financial distress.

== References ==
<references />

When a lack of hedging leads to ruin

2017-06-24T15:04:50Z

Hector: Created page with "== Firms Involved == * Renderi AB Slite == Year of the event == 1992 == Description of the case == Slite was a Swedish shipping company running a ferry line between Sweden a..."

== Firms Involved ==
* Renderi AB Slite

== Year of the event ==
1992

== Description of the case ==
Slite was a Swedish shipping company running a ferry line between Sweden and Finland. It had ordered a new ship built by the German company Meyer Werft and was supposed to take delivery of it, and hence proceed to the payment in 1992. When it had ordered the ship, Slite had decided not to hedge the transaction. Indeed, the DEM and the SEK were both members of the European Monetary System, and were both moving within the "monetary serpent". The volatility of the two currency was thus very small. However, the SEK was unpegged from the DEM in September 1992, leading the SEK to lose 30% to the DEM. The price of the ship to be received had just been increased by 30%. Slite could not afford this price, and went bankrupt in 1993.

== Take-aways ==
* Hedging is there to protect from large deviations: it helps make a company antifragile, ie. immune to black swans<ref>[http://www.fooledbyrandomness.com/ Nassim Nicholas Taleb's website]</ref>.
* When there is a risk of ruin, one must be ready to engage in costly hedging programs. They actually increase the value of the company by reducing or eliminating the costs associated to financial distress.

== References ==
<references />