Solutions in the case
Banc One’s stock price has fallen recently due to concerns of investors and analysts about the heavy use of the entity of interest rate derivatives. Dick Lodge, chief investment officer in charge of the bank’s investments and derivatives portfolio, the Director General shall recommend a plan of action to allay the fears of investors to the market and communicate the reasons for Banc One use of derivatives. The Bank uses interest rate swaps to manage its earnings sensitivity to changes in interest rates and attractive investment alternatives to conventional values. Lodge discussed three possible options to solve these issues. First, they could do nothing and hope that Banc One’s stock price would recover over time as investors realized that derivatives were actually helping the bank manage interest rate and basis risk. Second, they could abandon or severely limit their derivatives portfolio. Third, they could attempt to educate investors about how they used derivatives. None of the alternatives was riskless. Doing nothing might give the impression that the bank was hiding something, thereby confirming investors’ worst suspicions. If it caused Banc One’s stock price to stay low or fall even further, the bank’s ability to continue its stock acquisitions would be jeopardized. Eliminating its derivatives portfolio would leave the bank with greater interest rate exposure and few tools to manage it. Disclosing even more information was not a guaranteed solution. In drawing even greater attention to its derivatives portfolio, the bank might raise investors’ concerns or increase their confusion.
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