This article seeks at determining whether there is a corporate duty to hedge? Are directors of a corporation, at the very least, obliged to consider hedging strategies to hedge the risk of a corporation? The article is divided into parts. Part two of the paper will be presented in a later edition. The paper highlights the difference between hedging and speculation concluding that the derivatives are not per se inherent looses when they are used for hedging strategies. As such, the duty to use derivatives is limited only to hedging and not speculation. The paper states that the duty to hedge is not absolute and should be limited in two dimensions. First, it should be circumscribed by the limits established by U.S. case law on the duty of care, and therefore, should be seen as a subcategory of the latter. Second, the duty to hedge should be dependent on directors’ level of information, sophistication and the level of risk a company faces. [More]

I. INTRODUCTION

Inspired by the close interaction of law and economics, common law scholars have applied an economic perspective to bear legal problems in the last decades. This scholastic effort has produced interesting results in the United States where the sophistication of the courts and its judges allow a pragmatic application of economic theories to actual controversies.

Economists analyze legal rules in terms of efficiency. Reallocating resources in a society is considered efficient only if that reallocation makes someone better without making some others worse off. Economic theory has been broadly applied in the United States, particularly in the area of contract law. At the heart of its application lies the efficient breach hypothesis, a milestone of contract law and the law and economics movement. Simply put, the hypothesis suggests that promisors should be permitted, if not encouraged, to breach a contract whenever the net gains resulting from said breach exceed the net gains of performance. Parties are therefore encouraged to complete the projects they consider efficient while abandoning any other contractual project that results inefficient or wasteful. [More]