Tuesday, April 08, 2008
Boards need to get a grip on the concept of hedging
From Mr Michael MacCallan.
Sir, In light of the damage done to Mitchells & Butler's by interest rate and inflation hedges ("M&B's property ambitions turn sour", January 30) I was dismayed to see the statement that "the partners were persuaded to retain the hedges in the expectation of calmer times ahead".
When will corporate managements get a grip on, and understand, the concept of hedging? Hedging is used to manage risk of a specific or highly likely exposure; different products can be used for either eventuality. Where that risk exposure no longer exists, the underlying hedges must be closed out immediately; failure to do so means that management is effectively "taking a punt" and speculating on the results of an unhedged position. The consequences of this latter approach have, yet again, been clearly demonstrated.
See full Letter (paid subscription required).