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environment outlined by Pohlschroeder in his memorandum, it held
Southampton's exposure at this level until September 1990.
One might suppose that if the LIBOR Notes were acquired for
their utility to Colgate as a hedge within the partnership it was
because, even if Colgate might have desired leveraged exposure to
treasury risk at the outset, at some point in the future when a
rise in interest rates appeared imminent it would wish to
minimize its exposure. Yet, before the LIBOR Notes were
acquired, Colgate and Merrill had planned for the immediate
disposal of 30 percent of them. The timing of the acquisition
and disposition of the LIBOR Notes bore no relationship to
Colgate's interest rate expectations.
If Colgate had intended to use the LIBOR Notes for
protection against rising interest rates, they would not have
been a cost-effective instrument for this purpose. Colgate
appears to have had no reason to believe otherwise. In an
undated document entitled "Risk Allocation Analysis" that seems
to have been prepared for Colgate in late October or November,
before the LIBOR Notes were acquired, Merrill estimated that a
200 basis point increase in interest rates would cause $35
million market value of LIBOR Notes to appreciate to $40.31
million. This appreciation of just over 15 percent would offset
less than half of the devaluation of the Colgate bonds.
Southampton's original 17.07 percent pro rata share of the gain
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