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Link Technologies Case Report

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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 months, it means that investing in futures contracts was the right move because the cash flows are moving in opposite directions to minimize the risk. Another way to evaluate the performance of the hedging strategy is to compare the variance of unhedged cash flow and the hedged cash flow, expecting that that variance of the unhedged should be greater than the hedged cash flow. As seen in the table below, the variance of the unhedged is greater than the variance of the hedged when Link Technologies invested in currency futures contracts. Futures Variance | | Unhedged CF | 20,691,861,693.67 | Hedged CF | 2,774,199,924.92 | Difference | 17,917,661,768.75 |

Even though, the hedging program was perfectly implemented, Mr. Lee strongly believed that investing in futures was the wrong approach because the company experienced a loss of half a million dollars during the first three months. So, he “suggested” that the firm should now invest in call options because the “downside risk was known; you could not lose more than what you paid for the call.” Following this decision, they yielded “a net

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