Question

You are a finance expert and working as finance director for a manufacturing company.

Which approach (among the three) you will adopt and WHY?

1: - Hedging Approach

2: - Aggressive Approach

3: - Conservative Approach

Write an answer of 100 to 150 words on:

Answer 1

I will choose Hedging Approach.

It is also called maturity matiching approach. In this the requirement of short term assets are financed with short term liabilites and long term assets with long term liabilites.

This type of approach is better to make the company solvent for a longer duration of time. If we finance short term asset with long term liabilites then it may happen that the loans do not get fully utilised to take the benefit or the interest paid by us may overrun our revenues through those assets. In other words our interest expenses will be more than our income from that specific asset

On the other hand if we choose to finance the long term assets with short term loand then the probelm of renewing or revolving the loans will be there and with time and inflation it will be hard to get it refinanced everytime with short loans. Also longer term assets are much priced so it may not be possible to take such a huge amount with short term.

that why we have to go for asset liability matching or hedging approach.

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