Derivatives & Hedging

Litigation surrounding derivatives and hedging requires a clear understanding of the economics and finance of risk and often requires the ability to efficiently perform numerically intensive analysis. Our case experience ranges from the assessment of insurance risk to hedging foreign exchange, power, and natural gas exposures. In addition, we often are called upon to assist with the identification of proper risk management activities, and to distinguish these from tax-motivated activities disguised as risk management.

Selected Case Experience

RMBS Litigations

Residential Mortgage Backed Securities Litigation

Cambridge Finance Partners is involved in numerous litigations related to issuance of RMBS securities, related underwriting, and subsequent investor losses. These matters are ongoing and involve private and government actions as well as class actions.

Losses Related to Foreign Currency Hedging

Middlesex Retirement System v. Boston Safe Deposit and Trust Company et al

CFP’s Dr. Noah worked with defendant Mellon Financial Corp. and counsel to analyze losses related to a foreign currency overlay program implemented by a third party manager hired by Middlesex Retirement. We provided daily value calculations for a portfolio of hundreds of bilateral purchased and written foreign currency options contracts. Our analysis included calculation of portfolio sensitivities to market conditions as well as identification of periods of improper trading behavior given basic hedging concepts and written trading guidelines provided to the manager. Our work both measured historical losses as they occurred and allowed our clients to see exactly when improper trading took place. Additionally, we estimated total trading costs and compared these costs to those of a properly implemented hedging program. The case settled prior to trial.

Forward Markets for Energy

Valuation of a Terminated Forward Power Contract

In a dispute between a major power generator and an investor-owned utility, CFP’s Dr. Fenn, working with the law firm of Simpson Thacher, offered testimony regarding the valuation of a large forward power contract that had been lawfully terminated.  The difference between the two sides’ valuations was in the tens of millions of dollars.

Over the course of a one week arbitration in Los Angeles, CA, Dr. Fenn testified for nearly a full day before retired federal judge John Martin.  Dr. Fenn offered testimony on the distinction between price-takers and market-makers in forward energy markets, the price-impact of large trades, and the relationship between trading activity and price volatility.  Following arbitration the parties entered into a confidential settlement.

Risk Management Consulting

Improving Internal and External Communications

Careful communications about a corporation’s financial risk management program can be as important as the design of the program itself. Cambridge Finance Partners worked with a major merchant power generator to better communicate its hedging strategy, internally and externally. For example, we stressed education about the dynamic nature of hedging and the dissemination of relevant performance metrics.

Numerical Analysis for Risk Management

Software for Hedging Simulation, Option Pricing, and Risk Management

Simulation tools are necessary for understanding many problems related to valuation of complex securities, risk management, and hedging. In addition, simulations are often the only way to address intra-portfolio correlations that cannot be captured by closed-form mathematical solutions. We provide a full range of solutions, from programming of mathematical models to development of rich user interface designs that allow managers and attorneys to see how solutions work.


We work with Linux, SQL, Perl, PHP, Apache, Javascript, C, C++, Mathematica, and other programming and systems tools. We tailor solutions to all common computer systems.