Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (32173)	9/26/2008 11:33:58 AM
From: E_K_S	Read Replies (1) \| Respond to of 78711

Hi PauL - I saw the news too. They had some currency derivatives blow up and "poof" 15% of the company disappears. bloomberg.com Aracruz tumbled 14 percent, the most this decade, as its chief financial officer resigned. Sadia erased a quarter of its value after losing 760 million reais ($410 million) from currency trades and firing its head of finance. Votorantim Celulose e Papel SA fell the most since April 2000 after UBS AG said demand is ``unfavorable.'' B2W Cia. Global do Varejo led a drop in retailers after JPMorgan said demand in Brazil is weakening. ================================================================= I was aware of ARA and VCP's currency hedges and they actually made money from their hedges over the last few years. They used the derivative(s) to hedge their U.S. $ debt vs their income denominated in Reals. My other Brazilian stocks do not use such hedges but both GGB and Ultr have increased their long term financing obligations. I believe they are pegged to LIBOR and are in U.S. dollars. Therefore there is some exchange rate risk but only amplified if they use currency derivatives to hedge this risk. ULTR also uses FFA (Forward Freight Agreements) to hedge the spot bulk shipping rates against long term fixed rates. This at times works against them but over the long run should average out the income stream. I guess the lesson to be learned is that derivatives and hedge contracts are not necessarily bad but must be managed and NOT leveraged. It's hard to believe that with a two week move in the US dollar that got stronger could wipe out $410 million in equity. Something smells fishy as this was during the time of the announced merger of VCP and ARA and new financing was being arranged by JP Morgen. I wonder if JP Morgen called in their derivatives so they could book their gain. EKS