Finance - Hedging Strategies

Finance - Hedging Strategies Assignment example
Undergraduate
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Finance & Accounting
Pages 3 (753 words)
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Hedging Strategies Name: Institution: Hedging Strategies Hedging strategies refer to investments made to deter the risk of negative price shifts in an asset, in the future. Hedging strategies primarily entail the establishment of an offsetting position with regard to a related security, for instance, futures contracts…

Introduction

The essence of hedging strategies is to reduce business risks while deterring the creation of additional risks. Multinational firms encounter a multitude of risks, particularly as a result of their competitive exposures across the globe. General Motors has along experienced competitive exposure due to the Japanese yen. This exposure has a lot to do with the depreciating Japanese yen. However, the company is yet to establish clear guidelines to deal with the competitive risk caused by the yen’s continued depreciation. In essence, the company’s hedging strategies do not provide lucid hedging strategy guidelines. General Motor’s treasurer and finance vice-president Eric Feldstein had to establish robust hedging strategies to counter the risk posed by the depreciating Japanese yen. General Motors was incurring substantial losses as a result of market changes with regard to the US dollar and Japanese yen (Desai & Veblen, 2006). General Motors, therefore, sought to minimize currency risk to maximize its profitability. GM established a passive policy that involved hedging half of its commercial exposures on a regional basis. This means that GM’s hedging strategy involved a clear distinction between commercial and financial exposures. ...
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