Question
Ethics Module Part 2 CASE Milt Samuals joined Garrett Construction Company in 2005 in the budgeting section of the corporate treasurer's office. He worked with
Ethics Module Part 2 CASE Milt Samuals joined Garrett Construction Company in 2005 in the budgeting section of the corporate treasurer's office. He worked with a team of two accountants and a senior vice president of finance to provide pro forma budgets and financial statements. Although his undergraduate degree was in finance with an emphasis on investments, he still felt he was acquiring experience with his budgeting work. Nevertheless, he was quite excited when he learned that he was being shifted to a new department in the treasurer's office in which he would share responsibility for managing the excess funds of the corporation as well as participate in the hedging function that the corporation undertook to offset interest rate exposure. By 2010, he had moved to the top position in the hedging area. Samuals had the major responsibility for hedging against interest rate increases that might take place from the time Garrett Construction Company agreed to undertake a project until the time it was completed. The period often ran from 6 to 12 months. Samuals used financial derivatives such as interest rate futures and swaps to accomplish his purpose. Most often, he employed Treasury bond futures. He would sell (short) them to protect against interest rate increases. If interest rates went up, the market value of the bonds covered under the contract would go down, and he could close out or cover his position at a profit. As he explained it, he would establish the sales price at approximately $100,000, and if interest rates went up, he could buy them back at perhaps $95,000. The $5,000 profit he made on the derivatives would help cover the added interest expense that Garrett Construction Company experienced on its loan at the bank as a result of increasing interest rates. Of course, if interest rates went down, he would lose money on the futures contract, but that would be offset by the lower interest the company would pay. Basically, he was neutralizing the company's position regardless of what happened to interest rates. If the company had a large amount of interest rate exposure, Samuals might engage in 10 or 20 contracts at one time. Although Samuals was acquiring expertise in his hedging function, he eventually found himself becoming somewhat bored with his normal hedging activities. While he continued to hedge the company's interest rate exposure, he also began speculating on interest rate movements for the company. These contracts had nothing to do with the company's interest rate exposure. For example, if he thought interest rates were going down, he would buy Treasury bond futures contracts. If rates did go down, the value of the bonds covered under the contract would go up, and he would sell (cover) his position at a nice profit. Because only a small amount of margin (cash) was involved, he could really use leverage to establish spectacular gains (though sometimes there were losses). For the most part, Samuals was doing well, and he could not wait to tell Roger Garrett, the president of the company, about the new activity he had decided to undertake and how well he was doing for the company. He felt certain an added bonus was coming.
Question If you were Roger Garrett, would you be inclined to reward Milt Samuals with an added bonus? Why or why not?
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