Hedging myths II - “We'd rather stay flexible — hedging caps our upside.“

In Greek mythology Daedalus made wings of feathers and beeswax for himself and his son, Icarus, to escape from imprisonment. He gave Icarus one instruction: fly the middle path. If you fly too low, the sea spray will soak and weigh down the feathers. If you fly too high, the sun will melt the wax.

Enraptured by the thrill of flying, Icarus ignored his father’s warnings and soared higher and higher. The Sun’s heat melted the wax, causing the feathers to fall, and Icarus to plunge into the sea and drown. Icaria, an Island in the Icarian Sea near Rhodes, is named after him.

“Hedging caps our upside“ is one of the most dangerous myths. Remaining unhedged to try get a better price than the current forward rate is like managing risk with feathers and wax, but you might get tarred and feathered instead. Hedging is about ensuring predictable, smoothed prices. The treasurer who stays unhedged to try chase every cent of upside is flying at the sun. It’s great until the market moves against you and the wax melts. Volatility is a cruel teacher. If you want your exposures to stay airborne keep the middle path.

Next myth: “We can run our hedge book in Excel.” If you want to try guess who it is before reading the next article here’s a clue: it’s a never-ending task. Curious who it is or want to check if you are right see the next article here.