When Corporate Treasury is a Profit Center

Two newspapers, two countries, two industries, one story. In the NYT, it’s

Southwest,

whose oil-price hedges are now worth $2 billion. In the FT, it’s Porsche,

whose currency hedges have made $371 million this year, and whose stock-market

hedges, linked to its attempt to buy Volkswagen, might have made it as much

as $10 billion.

Both articles are laudatory, but John Gapper sounds

a note of caution:

Hedging is a zero sum game and I shudder when I hear of creative Treasury

management at industrial companies or public institutions.

Mr Härter should recall the debacle in Orange County. Or, for that matter,

take a look at Norway where four towns have suffered from investing in complex

US-linked debt securities sold to them by Terra Securities. When big banks

offer you innovative financial instruments, beware.

There is a difference here between Southwest and Porsche. Southwest really

only needed to lock in forward oil prices – an incredibly simple transaction.

Porsche, by contrast, boasts of its "options on options on options",

which is not the kind of thing to put an investor at ease, especially when billions

of dollars are at stake.

Nevertheless, there’s a reason that options are known as treasury products:

they basically exist to allow corporate treasurers to hedge market risk and

concentrate on their own business. All companies have natural exposures which

need hedging, and it’s up to individual treasurers to decide just how sophisticated

they’re willing to get. As long as it’s them telling the investment banks what

to do, things normally go OK. But Gapper’s right: if an investment bank offers

you a complex structured product which you don’t really understand, it might

be a great deal. But don’t buy it.

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