Question

Discussion Board Post

What’s selective hedging? Why do some MNCs choose selective hedging?

Answer 1

selective hedging :

selective hedging is a strategy adopted by the MNC's where they selectively decide to hedge the transactions treating each of them independently. these companies are mostly diversified across various countries and they feel the diversification benefits will negate most of the currency risk due to the movements in the exchange rate. They hedge in rare circumstances. decisions regarding weather to hedge or not is taken depending upon the amount and duration of exposure, economic trends and volatility. hedging involves costs and sometimes hedging a transaction makes a company suffer losses does more harm than good so they do not hedge comprehensively but they selectively decide weather to hedge or not.

when a company decides to hedge it will first investigate the :

1) amount of exposure that they have in a particular transaction

2)they may decide upon the technique to hedge

3)then they decide which hedging technique is best and optimal and weather to hedge or leave the transaction exposure as it is.