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Abstract

Corporate financial officers who are willing to hedge their exposures to various price risks are often reluctant to do so by means of long-term contracts with a maturity equal to the ''duration'' of their exposure. This case is used to illustrate the advantages and drawbacks of a short-term hedge (to be rolled over) on a long term exposure. Issues of basic risk are, of course, at the centre of the case situation. The case could also be used to illustrate the dangers of the various optional features attached to the long-term commercial contracts. Yet other issues can be discussed by raising the question of who is to blame for the MG debacle? Among these issues are questions of oversight, market liquidity, conflicts of interest etc. As an extension, one could ask the students to compare the degree of basis risk in various markets, e.g. foreign exchange markets. Software is available to accompany the case (reference number 298-005-0).
Location:
Industry:
Size:
DEM2,609 million
Other setting(s):
1992-1994

About

Abstract

Corporate financial officers who are willing to hedge their exposures to various price risks are often reluctant to do so by means of long-term contracts with a maturity equal to the ''duration'' of their exposure. This case is used to illustrate the advantages and drawbacks of a short-term hedge (to be rolled over) on a long term exposure. Issues of basic risk are, of course, at the centre of the case situation. The case could also be used to illustrate the dangers of the various optional features attached to the long-term commercial contracts. Yet other issues can be discussed by raising the question of who is to blame for the MG debacle? Among these issues are questions of oversight, market liquidity, conflicts of interest etc. As an extension, one could ask the students to compare the degree of basis risk in various markets, e.g. foreign exchange markets. Software is available to accompany the case (reference number 298-005-0).

Settings

Location:
Industry:
Size:
DEM2,609 million
Other setting(s):
1992-1994

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