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LINK TECHNOLOGIES1

Link Technologies, a small firm located in San Jose, California, is currently engaged in the development, manufacture, and sale of high-speed fax modems for use in personal computers. The company was created in 1980 by Mr. James Lee, a researcher who was employed at IBM’s T.J. Watson research center, and two former graduate school classmates from Cornell University. At the time, the personal computer business was in its infancy, and the company sought to fill a niche by providing communication networks to link mainframe computers. Although the company grew rapidly, Mr. Lee felt that the real opportunities for growth lay in personal computers. In the mid-1980s, he decided to make a major switch to the production …show more content…

Mr. Brown readily admitted that he was not at ease discussing the most recent approaches to risk reduction or hedging. He had received his MBA from Harvard in the 1960s and had spent most of his career working for a company that had little international exposure. Moreover, he was not familiar with derivatives such as currency options, which until recently were not widely traded. However, Mr. Brown had recently hired an assistant, Mr. Dan Pross, who had some knowledge of hedging and derivatives. As a student at UCLA, Mr. Pross had traded various types of derivatives for his own portfolio and was familiar with how they were traded. Although Mr. Pross did not have a finance background, he was, in Mr. Brown’s opinion, extremely intelligent and highly capable. Mr. Brown suggested that Mr. Pross make a presentation to the senior management on the use of derivatives to reduce risk. The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

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