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discussion of the function that the LIBOR Notes will perform. In
the section entitled "Risk Management Within the Partnership", he
calls attention to the importance of the partners' exposure to
the interest rate volatility of the Colgate debt in the
partnership portfolio, and states that the partnership will
acquire LIBOR Notes "[t]o minimize the exposure to ABN and
Colgate". "Based on the process of negotiation, a hedge ratio is
going to be negotiated with ABN which may not be a perfect
hedge." This might be taken to imply that a perfect hedge would
be desirable, if possible.
But Colgate would not really have wanted a perfect hedge.
Indeed, in Pohlschroeder's view, for the foreseeable future,
Colgate did not want to reduce its interest rate exposure within
the partnership at all. On the contrary, consistent with his
forecast of falling interest rates over the next 3 to 9 months,
in a different section of the memorandum Pohlschroeder states
that Colgate will use the flexibility of the partnership
structure to increase its exposure within the partnership
substantially above its pro rata share:
One of the most important aspects of the
partnership structure relates to the risk
management of the interest rate risk as
negotiated between Colgate and ABN. Colgate
will attempt to negotiate a close to 50/50
sharing of the treasury risk.
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