This was a complicated swap arrangement that brought immediate advantages to Metro do Porto nevertheless proved ruinous in the long run. Two years following the swap inauguration, a “snowball clause” in the swap arrangement took effect, increasing Metro do Porto’s obligation beyond 60 per cent per annum at a time when market interest rates were low and expected to drop even lower.
It was uncertain whether the business entered into this arrangement out of political pressure, ignorance, or both, but the end result was a lawsuit. Pupils are expected to analyze the conditions of this swap and determine whether the swap constituted great practice from a risk management standpoint and whether Metro do Porto should have been able to anticipate the possible losses.
Learning Objective: This case scenario is proposed for graduate student who are already familiar with the notion of an interest rate swap and understand the inner mechanism of a plain vanilla swap. The case scenario will assist those students to move on to comprehending exotic instruments based by investment banks for their customers, investigating the following important aspects of using financial derivatives for risk management:
The possibility for derivatives to increase as opposed to decrease danger for a business.
The thin line between using derivatives for hedging risks and speculating on anticipated market actions.
What motivate bankers and corporation executive to enter into derivatives transactions that are complex.
Publication Date: 05/06/2016
This is just an excerpt. This case is about Finance
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