Link Technologies Case Report

1314 words 6 pages
Amulya Gattu, Hanny Gomez, Tamta Kavtaradze, Sandra Vargas Amulya Gattu, Hanny Gomez, Tamta Kavtaradze, Sandra Vargas Link Technologies
Case Analysis
Link Technologies
Case Analysis

Link Technologies Case Report
The derivatives program was reducing risk when the firm was investing in foreign currency futures for the first four months from the implementation date (February 1991 to May 1991). This is seen by the negative correlation of (0.94226594) between the derivative (futures) cash flow and the unhedged cash flow. A purpose of a perfect hedge is to obtain a net of zero or in other words, reduce your risk to nothing not including the cost of the hedge. If a correlation is negative, as it was for the first three
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As the founders have substantial holdings in the company, they can impact and change decisions even though the treasury department suggests otherwise. For now, the switch to options shows a positive return on investment because the change in foreign currency fluctuations is going in the same direction. Once the exchange rates start to drop, the company will be in severe trouble because the hedging program is not working in the opposite direction of money loss as it is not setup to reduce risk but rather to maximize profit.
One of the derivatives we can use for hedging foreign currency risk is the forward contracts, which is an agreement between two parties to fix the exchange rate for a future transaction, at time T. this would eliminate exchange rate risk. However, since forward contracts are over-the counter contracts, they are subject to counterparty risk. There is a possibility that a counterparty to a financial contract defaults and would thus create a loss for the company hedging currency risk. I would sell a forward contract.
Another type of derivative that could be used and was used is the futures contract, which solves some of the faults of the forwards contract. This is similar to a forward contract, but the difference is that it’s much more liquid as it is traded in a more


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