The appropriateness of hedging instruments

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Firms Involved

  • PacifiCorp
  • The Energy Group

Year of the event


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[1] related to this aborted transactions, of which USD65m related to the termination of the forwards.


  • 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.


  1. PacifiCorp Will End Its Pursuit of The Energy Group