The company starts its “Hedging Operations” near
the epochal birth of the Euro.
As we all remember, 1999 was the
year in which the Euro was born near 1.17against the Dollar and caused much
anguish in the market by weakening throughout the year to end just above Parity.
In the process it dragged the Swiss Franc down against the Dollar.
The company, to its dismay, found itself making Cash
Losses on its “Sell USDCHF” hedges. To make up the initial losses, it sold
more USDCHF in ever increasing larger amounts right through the year, trying to
earn Cash Profits on interim bouts of Dollar weakness against the Swiss Franc.
Huge Sell USDCHF trades were daily entered into for making a few pips profits,
not realizing that the trades were all against the larger Trend.
Its focus on the Cash Profit/ Loss
made the company overlook the fact that the ongoing weakness in the Swiss Franc
was decreasing the value of the Loan on its Balance Sheet.
In an attempt to first earn
“hedging profits” and then to cover losses against the trend, it ended up
with a USD 1 million loss, negating, to a large extent, the real Valuation Gain
on its Balance Sheet.Had its
focus been on the Balance Sheet, the company would have stopped its “Hedging
Operations” after the first few hedges made Cash Losses and proved that the
market was actually reducing the value of its primary Loan exposure!
Sounds incredible? The moral of the story is that
a lot of thought and deliberation should go into deciding upon correct
objectives before commencing market operations.In a subsequent issue we shall take up the case of a company,
which started out with the correct objectives, but lost its focus and
underperformed as a result.
Case 2 - Keep the objective in mind - It pays.
Case 3 - Focus on objectives; Learn from your mistakes.