- 116 -
swap in this way is to defeat its very purpose as a hedge against
Colgate's exposure to the underlying debt issuance.
From Colgate's perspective, the partnership's investment in
the LIBOR Notes had the same effect as the modification of the
swap in this hypothetical. To the extent that changes in their
value were inversely correlated with changes in the value of the
Colgate debt, the LIBOR Notes counteracted the hedging effect
that Colgate was trying to achieve through its position in the
partnership and thereby increased Colgate's exposure to interest
rate risk.
Pohlschroeder's October 3, 1989, memorandum contains
quantitative projections that show this clearly. Pohlschroeder
analyzes the effects of a 200 basis point parallel shift in the
Treasury yield curve on Colgate's financial position. The table
presents his results.
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