Question

Critically assess why a business may hedge their exposure to changing interest rates

Answer 1

Business might hedge their exposure to changing interest rate because of the following reasons:

1) when there is a hike in the interest rate the business need to have check how much they need to pay on the borrowings in future

2) if the business might get profit from the interest rate hike or business might face loss due to decrease in interest rates.

If business might not be aware of the changing interest rates it might effect their cash flow statements, their balance sheet might get effected. If any organisation need to pay high interest rates on borrowing it might face losses. The changing interest rate are the biggest topic of concern for any business to survive in the market.

If in case there is hike in interest rates the business will earn lot of profits form their deposits and if the interest rates decreases the business will face loss/ risk might be generated, as the interest earned will be less on the deposits. The changing interest rates are as per the government rules and regulation.