Financial and operational hedging techniques essay

Financial risk management is an approach in where a firm practices its financial evaluation utilizing some financial instruments in order to handle very little direct exposure to risk, specifically to credit risk and market risk. There are a number of kinds of dangers which are Foreign exchange, Liquidity, Volatility, Sector, Shape, Inflation threats. When financial risk management is initializing it requires sources, the techniques of measurement and eventually methods to recognize them. When a person is associates with financial risk management will not have the ability to make any financial investment choice for a business.

Financial and operational hedging techniques essay

LinkedIn Exchange rates play an important role in determining corporate profitability and competitiveness. The current strength of the Canadian dollar poses unique risks and opportunities for Canadian companies with global supply chains and those who sell in many geographic markets.

Financial and operational hedging techniques essay

Specifically, firms must manage having their revenues denominated in Canadian dollars and their costs denominated in other currencies.

Exchange rate fluctuations, specifically a steep fall in the loonie, will introduce significant variability in costs and revenues potentially wreaking havoc on profitability, competitiveness and shareholder value. While there are solid benefits to a strong dollar e.

Managers would be wise to pursue a more holistic and longer-term approach to risk management, with particular attention paid to operational strategies.

The loonie is at a record high versus key foreign currencies. S counterpart on average this year for the first time in three decades. The currency averaged Is a strong loonie sustainable in the long term? The larger the overvaluation and the longer it is sustained, the greater the business risk.

Why hedge?

A rapidly falling loonie will have serious implications for Canadian firms with outsourced production including higher input raw material, labour and transportation costs, a potential loss of domestic market share versus domestic producers and eroding profit margins.

There are many macro-economic and political reasons why the loonie could drop quickly and precipitously. Ongoing uncertainty around the European debt crisis as well as a slowdown in Chinese growth may dampen the global economy and demand for the commodity-driven loonie.

Canadian fiscal performance may hit the skids plus there remains the potential for falling interest rate spreads versus the U. Finally, continued political instability in the Middle East and Asia threatens to create instability in the currency markets.

Canada is a relatively small currency market and is not a safe haven for international investors in times of turmoil. When fear grips markets, flight-to-safety flows hurt the loonie.

In an integrated global economy, companies face strong interdependencies across their risk categories — strategic risks, operational risks, financial risks and external risks — which can quickly degrade their competitive position, limit decision-making flexibility and shrink operating margins.

Traditional financial hedging tools, designed to smooth out short-term cash flows, are often insufficient or too expensive to address large and sustained exchangerate shifts.

Managers would use operational hedging strategies in conjunction with financial hedging to pre-empt or mitigate the effects of a large, exchange rate-triggered change in their cost structure, customer demand and competitiveness. Firms should approach operational hedging in a systematic fashion by: In terms of operational hedging, strategic choices could involve evaluating the location of production facilities, sources of raw materials, pricing strategies, logistics networks, and how sales and marketing channels by geography are organized.

When deployed proactively and carefully, operational hedging can be a powerful tool to minimize the impact of major currency shifts on costs and revenues, while enabling firms to potentially leapfrog less-agile competitors. Mitchell Osak is managing director of Quanta Consulting Inc.complementary to financial hedging since operational and financial hedging strategies are used for managing different types of risk exposures, i.e., operational hedging for long-term exposure (economic exposure) and financial hedging for short term exposure (transaction exposure).


Exposures, Financial Contracts, and Operational Techniques - Essay Example. Comments (0) Add to wishlist Delete from wishlist. Summary.

hedging techniques. It is well recognized, and mostly anecdotally advocated, in the finance and international business literature (see Lessard and Lightstone, and Hertzell and Caspar, among operational hedging strategies in operations management and. Managing Currency Risk with Financial and Operational Hedging Techniques Essay Introduction Overview of the hedging techniques In the financial market, almost all of companies need to face the currency risk. Operational hedging is also less important for commodity-based firms, which face price but not quantity uncertainty. For firms with plants in both a domestic and foreign location, the foreign currency cash flow generally will not be independent of the exchange rate.

Financial hedging techniques. The investment risk can be hedged or reduced by using call options, put options, short selling or futures contracts. All these different hedging techniques are .

Financial And Operational Hedging Techniques

Introduction Overview of the hedging techniques In the financial market, almost all of companies need to face the currency risk. In order to manage the currency risk, companies will use different hedging techniques, such as financial and operational hedging techniques.

Advantages And Disadvantages Of Hedging Techniques Finance Essay Published: November 27, This report will discuss the basics of hedging, advantages and disadvantages of hedging.

It Risk Management Essay. Information Technology Risk Management Risk management is the continuing method to recognize, examine, appraise, and treat loss exposures and monitor risk control and financial resources to diminish the adverse effects of loss (Marquette). Operational hedging is a holistic risk-management approach that allows for greater flexibility in how supply chains, product distribution patterns and market-facing activities are designed and.

Financial Hedging & Hedging Strategies & Examples | Sucden Financial