The Collapse of Pasminco: Misjudgment, Misfortune and Miscalculation
Posted: 5 Feb 2012
Date Written: August 25, 2011
In September 2001 when Pasminco Ltd was placed in voluntary administration, it was the world’s biggest zinc producer with over 10% of global output. This paper examines the hedging strategies that Pasminco had in place in the years leading up to the firm being declared insolvent and documents the financial factors that contributed to the corporate collapse. We build a valuation model that illustrates in stark terms that the company’s hedging strategies materially reduced neither the exposure to market risk nor the probability of financial distress, and were a major contributing factor to the company’s downfall. The analysis in this case study contains valuable lessons for companies facing quantity and exchange rate risk.
Keywords: exposure, hedging, market risk, value-at-risk
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