Question

Explain why companies hedge foreign risks?

Answer 1

Companies hedge foreign risks due to followings reasons;

1. Companies involve in hedge foreign risks for protecting profit margins. As we know that sometime due to foreign exchange risk profits can be negatively affected hence for protecting negative impacts of such foreign exchange risks, companies go for hedge foreign risks.

2. For making stable and predictable cash flows, companies also hedge foreign risks because in case of volatile foreign exchange we can not hope for stable & predictable cash flows for the companies. Hence for meeting such objectives companies hedge foreugn risks.

3. In competitive market, every company want to remian competitive so that such company can beat its competitors. So in case of foreign exchange risks a company can be negatively affected hence for removing such negative effects every company want to hedge foreign risks.

4. Companies also can hedge foreign risks for taking advantages of the extreme movements in the exchange rate etc.