Question

How would the company Apple find hedging important for improving financial forecasts or budgeting?

Answer 1

Financial forecast is the estimation of the future financial inflows or outflows of the company. It involves predicting how a business performs in future.

Budgeting on the other hand is a plan drawn to acheive the company's targets. This is drawn systematically using budgeting techniques. It is not estimation or projection of future but the plan to follow to acheive desired results in future.

Hedging is a set of measures used to minimise the risk of adverse movement of the underlying stock or investment.

Apple Incorporation has very high risk regarding adverse movement of currencies, interest rate, stocks as it has many foreign currency receivables, payables, foreign interst rate payable and receivable, stocks in investment outstanding as on balance sheet date (along with foreign branches). In order to predict the Cashflows of the future, we do not have certainty over the cashflow as there will be fluctuations in the interest rates, exchange rates and stock prices. Inorder to make the Cashflows certain, we can eliminate the risk of fluctuations we can enter into hedging contracts. This will make the future Cashflows certain. Which will thus help in improving financial forecasting and budgeting.

There are various of hedging like forward exchange contracts for currencies, currency future contracts, money market hedge, forward contract of interest rate, interests future contracts, FRA's, Call and Put option on investment etc.

Thus using these hedging techniques, we can make the uncertain future Cashflows certain and then use them in the forecasting of financials and budget preparation