This website uses cookies to ensure you have the best experience. Learn more

Hedging Essay

453 words - 2 pages

Hedging involves taking an offsetting position in a derivative in order to balance any gains or losses to the underlying asset (Sargeant, 2014). Most companies in existence today do this (futures contract) to keep interest rates and other prices stable in case they do go up. For instance, a company that makes doughnuts might by its raw materials (sugar and flour) at an established price with its supplier set for a certain amount of time, which is probably six months to a year, and an airline company might set up bids with fuel companies to purchase jet fuel at a price set for a year, keeping airfares as low as possible. Most investors and analysts view interest rates as ...view middle of the document...

Haslett also mentions how companies that hedge against price or rate fluctuations have the advantage of more consistent cash flow (Brin, 2011).
Speculators make bets or guesses on where they hope or think the market is headed. If they believe a stock may be overpriced, they might possibly short sell that stock and wait for the price to hopefully decline so they can buy the stock back to receive a profit. Speculation can be extremely risky simply because speculators are vulnerable to both the downside and upside of the market (Sargeant, 2014).
In the business world we consider hedging as a shield to protect our investments. The Word of God can also be considered hedging because we use His word as a shield to protect us. Psalm 5:11(KJV) states, “But let all those that put their trust in thee rejoice: let them also love thy name be joyful in thee.”
In summary, hedgers are seen as risk averse and try to reduce the risks associated with uncertainty whereas speculators are seen as lovers of risk and tend to bet against the movements of the market trying to profit from fluctuations in security prices (Sargeant, 2014).

Sargeant, N. (2014). What is the Difference Between Hedging and Speculation? Retrieved
Gad, S. (2013). How to Hedge Against Rising Rates. Retrieved from www.realmoney.
Brin, D.W. (2011). Hedging Still an Effective Tool in Smoothing Company’s Cost Structure.
Retrieved from
The Holy Bible (King James Version).

Other Papers Like Hedging

Hedging Dozier Industries Essay

1191 words - 5 pages Dozier Hedging Alternatives Forward Market Hedge: Dozier would purchase U.S. dollars under a forward contract. The contract would obligate Dozier to pay £1,057,500 in exchange for £1,057,500 x 1.4198 $/£ = $1,501,438.50 assuming the transaction was at the quoted 3-month forward rate in Exhibit 4. Relative to the value of the contract at the current exchange rate, £1,057,500 x 1.4370 $/£ = $1,519,627.50 Dozier would accepting a

Hedging Currency Risks At Aifs Essay

723 words - 3 pages currency exposure. Hedging based on projected sales totals is difficult, especially when certain events that can materially impact volumes are well beyond the company’s control. If no hedging was done, the company would be fully exposed to the movements in exchange rates after each price was set/catalog was issued. The magnitude and direction of the movements from when the price was locked in would determine the gain or loss on each individual trip

A Study on Hedging Tools to Minimize Risk and Maximize Returns

786 words - 4 pages A STUDY ON HEDGING TOOLS TO MINIMIZE RISK AND MAXIMIZE RETURNS ABSTRACT OF THE STUDY A derivative is a financial instrument whose value depends on other, more basic, underlying variables. The variables underlying could be prices of traded securities and stock, prices of gold or copper, prices of oranges. Derivatives have become increasingly important in the field of finance. Options and futures are traded actively on many exchanges. Forward

The Role of Oil Futures in Risk Management

3654 words - 15 pages key role in risk management for a number of industries including transportation and manufacturing. This report provides principal knowledge about oil futures and its role in hedging the risk of oil price volatility. A case study of US airline industry with most updated data obtained from Bloomberg system is also discussed, which suggests the effectiveness of oil futures in risk management for most airlines companies. However, in some case, the

Reasearch Methods

4884 words - 20 pages Study the Role of Hedging to Reduce Exchange Risks on Investments in Global Stock Market Executive Summary In this global business environment, organizations are engaged to perform business activities across the countries. In order to execute international activities, they are tended to receive and make payment in different currencies. Currency value of country tends to change due to several economic aspects such as government decisions

Pasific Salmon

545 words - 3 pages selected comparable company’s financial statements). On top of this RRR should keep the opportunity for ISN to re-acquire up to 12.5% of the company, valued at $13.97 million since ISN is not selling PSC by choice [refer to Exhibit 3]. It is also recommended that RRR pursue the hedging program. The probability of bankruptcy in the year 2000 without hedging is 13.08% and with hedging is 4.77%, [refer to Exhibit 4]. Supporting Analysis: The


1216 words - 5 pages Contracts to hedge the foreign exchange risk. A forward contract is a contract to exchange a fixed amount of f financial assets on a fixed future date at a fixed price. The fair value of a forward contract is affected by changes in the spot rate and changes in the forward points. Although the Group has used forward contracts in the past, the adoption of IFRS 9 Hedge Accounting has not been applied because the tenure of the contracts was hedging


1223 words - 5 pages on export markets Hedging risks has both implicit and explicit costs that can vary depending upon the risk being hedged and the hedging tool used, and the benefits of hedging include tax savings, better investment decisions, lower distress costs, more freedom to fine tune capital structure and more informative financial statements. The first benefit is tax benefits a firm that hedges against risk may receive tax benefits for doing so, relative

American Barrick Case

2141 words - 9 pages hedging instrument for ABX to utilize given its hedging strategy and the challenges it might encounter in following its hedging policy. ABX’s Hedging Policy One of the most important factors that investors consider before committing their funds to a corporation is the quality of the management team in charge of running the day to day operations of a firm and ABX enjoyed of a best-in-class management team that brought not only a wealth of experience

Foreign Exchange Derivatives

1594 words - 7 pages  contracts, currency swaps, forward contracts and futures contracts. Types There are three types of foreign exchange derivatives used for hedging as follows: I. Forward Hedging II. Money Market Hedging III. Option Hedging Forward Hedging It refers to the Contract to buy or sell an asset at a given price on a specific date in the future. Investors use this device to avoid major losses if the price of the asset changes dramatically

Tiffany Co

1656 words - 7 pages countries, there are a continuing series of foreign currency receivables and payables. Thus, Tiffany should have a foreign currency hedging program to cover these foreign exchange exposures. The objective of hedging would be to stabilize product costs, over the short-term, despite exchange rate fluctuations. In the long-term, if exchange rate differences have significantly changed, it is possible to adjust retail prices when necessary to maintain

Related Essays

Gm Hedging Essay

635 words - 3 pages Recommendations Increase hedge to 75% for hedging the Canadian exposure. The combined hedge percentage is to account for both operational as well as balance sheet hedge due to monetary assets on the balance sheet. Hedge the Argentina position. Hard currency assets must be increased. Hedging can be done using the forward rates of another reliable hard currency. Other natural ways to hedge would be through commodities exports/imports done by

Currency Hedging Essay

685 words - 3 pages Currency Hedging When companies conduct business across borders, they must deal in foreign currencies. Companies must exchange foreign currencies for home currencies when dealing with receivables, and vice versa for payables. This is done at the current exchange rate between the two countries. Foreign exchange risk is the risk that the exchange rate will change unfavorably before payment is made or received in the currency . For example, if a

Hedging Currency Risk Essay

1859 words - 8 pages advantage of the situation and undercut AIFS’s price. However, the company’s pricing policy definitely has an advantage; over 70% of their sales are returning customers, according to Archer-Lock and Tabaczynski. AIFS has a fairly simple solution in response to their exposure to currency risks; they use foreign exchange hedging to protect against unfavorable fluctuations in the exchange rates. Without hedging, the company would be exposed to

Hedging In Gm Essay

2468 words - 10 pages translation exposure of C$ 2143 millions. General Motors used a passive hedging policy and decided to Hedge the transaction exposure by 50% equal to CAD 841 millions. They also decided not to hedge translation exposure. Q2 Translation Exposure Since USD was effectively the primary operating currency of the Canadian subsidiary functional currency, it is also the functional currency of the Canadian subsidiary. Therefore, temporal method