Should a firm always hedge the foreign exchange rate exposure?

Expert Solution

No, firm should not always hedge the foreign exchange exposure because if there exposure is expected to have a very lower rate of fluctuations and the firm is expecting the exposure to provide it with favourable fluctuation then the the companies may choose not to hedge because it will be providing them with profits which are not offset by the cost of hedging.

Hedging will be not just leading to mitigation of loss but it will also lead to elimination of profits to a large extent and those Firms who are aggressively looking for making a higher rate of return on exchange rate fluctuation will be trying to not hedge their exposure because they want to gain through their exposure and they also do not want to incur cost on hedging because if the currency does not show any fluctuations, then the cost of hedging will be the ultimate loss, and hence the firm may choose not to hedge their foreign exchange exposure.

jeff jeffy answered 1 year ago

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