The effect of hedging contracts on the calculation of derivatives losses

Author: | Published: 1 Jan 2000

When can a party to a derivatives contract recover losses it sustains in hedging its position? A recent case in the Commercial Court has considered this issue in the context of a dispute between two market counterparties and arose out of the 1998 Russian banking crisis (Australia and New Zealand Banking Group Limited v Société Générale, judgment of Mr Justice Aikens September 21 1999 — unreported).

In November 1997 ANZ and SocGen entered into a series of non-deliverable forward foreign exchange (US dollar/Russian rouble) contracts, or NDFs. They were to be settled in October and November of 1998. SocGen hedged its position by entering into equal and opposite contracts with Banque Société Générale Vostok, a Russian bank affiliated to SocGen. The banking moratorium imposed by the central bank on August 17 1998 prohibited Russian banks from performing their obligations under foreign exchange transactions.

ANZ and SocGen included in the trade...