Hedging myths V - "We've hedged everything. We're fully covered."

Achilles was the greatest of all the Greek warriors. His mother dipped him in the river Styx as an infant, holding him by one heel, leaving it untouched by the waters and thus his only vulnerable body part. He was killed near the end of the Trojan war by Paris who shot him there with an arrow.

Today the term Achilles' heel has come to mean a point of weakness which can lead to downfall, especially in someone or something with an otherwise strong constitution.

Treasury teams don’t recognise their own Achilles heel in hedging all the time. Everything looks covered: the FX is hedged, energy costs hedged, the board pack says green. Meanwhile, procurement has just signed a contract indexed to copper prices, a major FX overseas payable has been incorrectly entered in the spreadsheet, and the sales forecast is three months out of date.

Risk doesn't attack where you're strong. It finds the spot you didn't cover.

The Achilles heel of hedging is not the hedge itself but the gap between the company’s real exposure and what management thinks is hedged. Make sure you properly understand and map all your exposures. Visibility is the first hedge.

We hope you are enjoying our series where we call on ancient Greek heroes to help dispel hedging myths.

Next myth coming up is “Derivatives are for speculation”. Guessing the hero for this one is tough, but there’s a good clue in our company name, Forge aHedge. See here to find out.