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Derivatives, Risk Management, and Hedging Strategies

The Brattle Group provides consulting and expert testimony on the theory, valuation, use, and regulation of derivatives. The Brattle Group’s staff and affiliates include professors and former practitioners in risk management and derivatives; specifically: a Nobel Prize winning economist, a former director of risk management at a large broker-dealer, and an author of a leading graduate level textbook on risk management and derivatives. We regularly work in collaboration with industry experts including former traders, risk managers, and compliance professionals.

The range of derivatives instruments we are retained to analyze and value is wide and can be originated and traded a number of different ways: exchange-traded like a futures contract, over-the-counter as a counter party’s obligation (such as a swap), publicly offered as a trust-issued claim against the trust’s own assets like a collateralized mortgage obligation (CMO), or a hybrid instrument such as a synthetic collateralized debt obligation (CDO) sold as a 144A private placement. Our analysis often concerns how derivatives were used and whether for reducing financial risk through hedging or for taking risk as part of an investment strategy. The Brattle Group experts analyze the economic value and performance of instruments in terms of the underlying assets, payment conditions, and trading venue. They also evaluate suitability and performance of derivatives whether used as investments or to hedge.


Below is a list of representative engagements for our Derivatives, Risk Management, and Hedging Strategies practice.

Role of derivatives in hedge fund collapse
On behalf of an investor in a failed hedge fund, The Brattle Group applied financial pricing theory to value derivative instruments whose values were tied to the performance of underlying asset portfolios, including CDOs, CDOs-squared, and credit default swaps. We analyzed the fund’s investment decisions, compliance with the investment guidelines, and performance reporting.
Hedging interest rate exposure of accounts receivables
The Brattle Group evaluated the economic performance of a series of Treasury security short-sales purportedly used to hedge changes to the value of an accounts receivable portfolio as interest rates varied.
Total return swap market-to-market dispute
In a dispute between a hedge fund and a major bank, The Brattle Group was retained to analyze the marking to market and eventual liquidation of a portfolio of syndicated loans underlying a total return swap. We worked with a former loan trader to discuss the liquidity of the secondary loan market in the aftermath of the Lehman Brothers bankruptcy filing, evaluate the reasonability of the bank’s method of marking to market the portfolio assets and of liquidating the loan portfolio through a BWIC auction, and estimate the market value the loan portfolio.
Repo market margin call valuation dispute
The Brattle Group has been retained to provide expert testimony in a dispute between an investment fund and a major broker-dealer involving the repo financing of a multi-billion dollar portfolio of mortgage-backed securities. Our experts evaluated the procedure followed by the broker-dealer to issue margin calls and handle valuation disputes in light of market practice and the provisions of the Master Repurchase Agreement, evaluated the marking to market and eventual liquidation of the MBS portfolio, and calculated damages from the early termination of the repo financing arrangements.
Long Term Capital trading and valuation analysis
The Brattle Group evaluated the structured finance transactions, business practices and trading strategies, including the use of derivatives, of Long Term Capital Management. This involved valuation of assets including securitized lease payments from computers, box cars, trucks, aircraft and telecommunication equipment, over-the-counter derivatives on liquid and illiquid instruments, and a private-placement transaction.
Foreign currency options modeling
In connection with litigation, The Brattle Group applied option pricing theory in a scenario analysis to estimate the risks and likelihoods that foreign currency options would be exercised.
Derivatives valuation and disclosure issues
The Brattle Group has assisted clients in litigation matters involving the proper application of mark-to-market and derivative accounting in the energy industry. Specifically, we provided litigation support in securities litigation matters regarding the valuation of energy contracts and the application of accounting principles to the proper disclosure of power derivatives and hedges.
Assessment of AIG’s risk management
In Starr v. US, The Brattle Group evaluated the risk management practices of AIG prior to the credit crisis to evaluate the extent to which its risk controls and reporting were consistent with customary practices. A Brattle expert provided testimony evaluating AIG’s management of its risk exposure to subprime mortgage defaults and the timing of its response to the increase in defaults prior to the credit crisis.
Optimization of trading strategies and hedging
The Brattle Group has advised on all aspects of risk management techniques and hedging programs adopted by power companies. We have analyzed the efficiency of trading strategies and developed estimates of critical option valuation parameters, such as trend, volatility, term structure, and correlations of the future prices of electric power and the various fuel indexes. We have assessed the financial risks of energy company portfolios consisting of production facilities, purchase/sale contracts, and retail customers, and quantified the underlying price and volumetric and operational risk exposures.
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