Newspaper article THE JOURNAL RECORD

Derivative Usage Cut

Newspaper article THE JOURNAL RECORD

Derivative Usage Cut

Article excerpt

By Karen Gullo

Associated Press

NEW YORK _ Financial managers at U.S. companies have been relying on derivatives for years to manage exposure to changing interest rates and fluctuations in exchange rates of foreign currencies.

But in the wake of news that several firms lost money on the transactions, many have been directed by superiors to pull back or slow down the practice of using derivatives, corporate treasurers say.

The fear that a derivative _ a financial contract whose value is based on, or derived from, a market such as stocks, interest rates or currencies _ could go bad has spooked corporate directors and chairmen, who in recent weeks have placed nervous calls to treasurers' offices, seeking details on their companies' involvement in the instruments.

Concerns about derivatives may reverse _ at least in the short term _ a trend toward more risk-taking in financial management that had emerged in recent years as companies, hit hard by the recession, sought higher yields on investments and more profits from nonoperational departments such as the treasurer's office.

Don Aquila, director of treasury operations at Thomas Betts Corp., a Memphis-based manufacturer of electrical components, received a call from senior management a few days after one of the nation's largest companies _Procter Gamble Co. _ said it was burned on two derivatives contracts.

"The board asked for a report on all our derivatives," said Aquila.

P G's soured deals, revealed in mid-April, resulted in a $157 million loss for the consumer products manufacturer. Its treasurer was put on "special assignment."

Thomas Betts has a number of derivative contracts, but they differ greatly from the type of transactions involving P G and are far less risky, Aquila said.

The company has swaps contracts, in which it makes an agreement with a bank, or a third party with a bank acting as intermediary, to exchange money based on a prearranged formula.

Companies use these transactions as a tool to reduce borrowing costs. For example, a company will borrow money at a floating rate and enter into an agreement to swap those interest rate payments with fixed rate payments. …

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