When a lack of hedging leads to ruin

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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[1].
  • 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

  1. Nassim Nicholas Taleb's website