When hedging becomes speculation
From Hedge.lu
Firms Involved
- Air Products and Chemical
- BOC Group
Year of the event
1997
Description of the case
In July 1999, US gas and chemical company Air Products & Chemicals announced a £7.2bn bid for UK-based BOC Group. Six previous attempts to take over BOC had failed, and in May 2000 the deal collapsed as Air Products failed to meet a deadline with the FTC (Federal Trade Commission). However, Air Products had entered into forward contracts to hedge the transaction, and was forced to close its positions in May 2000, as the pound was at an all-time low, resulting in a pre-tax loss of $595m.[1][2].
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.
