In: Finance
How does hedging improve a company’s borrowing capacity? For example, Apple?
Hedging is a risk management strategy which intends to reduce the fluctuations in cashflow or profit by a company. Apple has advantages due to hedging in its topline as well as bottomline of profit. The heding are mainly done by apple for currencies since its major transactions are across the globe which creates exchange rate and currency risks.
Due to hedging the risk of Apple in terms of its cashflow significantly came down and due to this the company is producing a stable cashflows. It is already a cash surplus company and due to the already available huge stable cashflow, the credit rating of the company has increased. Since credit rating will be higher for companys which are relatively stable and have consistent cashflows, the borrowing capacity of Apple is sufficiently higher than its peers.
Apple uses Hedging strategies in currency to reduce its foreign currency exposures. It holds currency hedging contracts from which has a carrying value of 132 million in June 2014 quarter and increased to 3.5 billion by Dec 2014 quarter which is intended to reduce the negative impact of increasing dollar value on its profits. Due to such hedging Apple saved more than 600 million in 2015.