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Hedging Protects Profit

September 18, 2013 − by Keith − in Blog − Comments Off on Hedging Protects Profit

Companies are in business to manufacturer and sell products. They have an obligation to their shareholders to make profit from the margin on the sale. Hedging protects profit or locks in the cost at the onset. Where markets move from that point on, up or down, does not really matter.

Those companies that have a basic risk management policy to minimize risk should hedge using the cheapest method which usually include basic us of derivatives. FX Forwards are the most common to hedge foreign currency risk. Companies that have personnel who are knowledgeable of the derivative market should have a more specific risk management policy defined. Companies that are fearful of hedging are not understanding that its a zero sum game. As the exposure loses in value the hedge gains in value and visa verse.

If you outsource your risk management to a third party someone in the company better understand what is going on in order to explain to management why more money was not made when markets moved in their favor.

Remember, under US GAAP or IFRS companies must either have a hedging policy in place or not. Choosing when to hedge or not hedge is speculating.

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