Maybe There is More Than One Reason They Call It a Derivative Lawsuit – The Implicit Corporate Duty To Hedge, 1 J. Marshall Global Mkt. L.J. 29 (2012)

Authors

Joseph Michael Reyes

Abstract

Derivatives became the primary scapegoat after the financial markets crashed in 2008 and many large investment banks collapsed in the aftermath. Derivatives were thought to be far too risky and not transparent, even though derivatives were originally contrived in order to mitigate risk. Contrary to popular opinion, if used properly, derivatives are very effective in the mitigation of price changes, currency exchange, and interest rate risk. Moreover, the current regulatory landscape encourages the use of derivatives to hedge risk. The current financial environment encompasses the widespread use and acceptance of products that allow hedging to be a common trade practice. The failure to use such financial products in order to hedge risks or to acknowledge hedging opportunities that can add to the profitability of the corporation may be a violation of a corporate fiduciary’s duty to hedge risk. This Article seeks to determine whether, under existing case law, there is an implicit corporate duty for corporate directors to educate themselves on the use of derivatives in order to hedge risk. Further, this Article asserts that United States law implies a corporate duty to hedge risk within the umbrella duty of care. Finally, this Article maintains that a corporate director should take prudent action to invoke the protections of the business judgment rule, consult with experts in the field, and delegate risk management to those individuals who may be more qualified to assess corporate risk.