Firms see volatile exchange
rates as the top risk for the years ahead. With the market conditions remaining
difficult since the financial crisis and uncertainty with foreign exchange
markets are greater now than they have been at any point in recent history,
does not come as a surprise to me. Due to this fact, companies are increasingly
looking to do business in emerging markets to take advantage of their growth
potential (Kuepper, 2014).
For example, in 2013 a private-equity firm 3G capital unveiled plans to buy Heinz in a $23 billion deal. This was one of the largest acquisitions in the world. As a result of this deal, it has taken Heinz private as it tries to expand sales in emerging economies, at the same time as managing a challenging environment in developed markets (Tracer, 2013).
In order to manage currency related risks in overseas markets, companies can open bank accounts in the country in which they are trading in. According to RBS (2014), they have experienced an increase in demand for such accounts from clients with larger operations in overseas markets. This can be a strategy to manage currency related risks.
Moreover, hedging can be another strategy for an investor to avoid potential losses that may be suffered by an organisation. Companies must be able to determine whether, in fact hedging is the most efficient way to mitigate the impact of currency fluctuations. For example, it has come to my attention that US companies that do significant amounts of their business in Japanese Yen and are starting to see some serious costs associated with currency’s recent decline (Schoenberger, 2011). Although companies may have spent much of the past year focusing on protecting themselves from fluctuations in European currencies, the impact of the dollar-yen exchange rate over the last quarter has taken many companies by surprise. A company’s situation can worsen if they fail to put in hedges to absorb some of the impact. Therefore, in this case I think hedging is extremely important to avoid any potential losses that companies may face.
On the other hand, the decision to hedge will depend greatly on the situation in which the hedge is applied, as well as the cost. In some situations, a hedge will be absolutely necessary (as mentioned in the situation above) to make sure that the investor will remain financially solvent, regardless of the outcome. However, in other cases it merely signals an overcautious investor cutting into his/her own position (Masquelier, 2011). For example, if the main position produces profits as planned, then the hedge in this context would be an unnecessary expenditure. If I were an investor, I would question the benefit of the original investment in this way.
For example, in 2013 a private-equity firm 3G capital unveiled plans to buy Heinz in a $23 billion deal. This was one of the largest acquisitions in the world. As a result of this deal, it has taken Heinz private as it tries to expand sales in emerging economies, at the same time as managing a challenging environment in developed markets (Tracer, 2013).
In order to manage currency related risks in overseas markets, companies can open bank accounts in the country in which they are trading in. According to RBS (2014), they have experienced an increase in demand for such accounts from clients with larger operations in overseas markets. This can be a strategy to manage currency related risks.
Moreover, hedging can be another strategy for an investor to avoid potential losses that may be suffered by an organisation. Companies must be able to determine whether, in fact hedging is the most efficient way to mitigate the impact of currency fluctuations. For example, it has come to my attention that US companies that do significant amounts of their business in Japanese Yen and are starting to see some serious costs associated with currency’s recent decline (Schoenberger, 2011). Although companies may have spent much of the past year focusing on protecting themselves from fluctuations in European currencies, the impact of the dollar-yen exchange rate over the last quarter has taken many companies by surprise. A company’s situation can worsen if they fail to put in hedges to absorb some of the impact. Therefore, in this case I think hedging is extremely important to avoid any potential losses that companies may face.
On the other hand, the decision to hedge will depend greatly on the situation in which the hedge is applied, as well as the cost. In some situations, a hedge will be absolutely necessary (as mentioned in the situation above) to make sure that the investor will remain financially solvent, regardless of the outcome. However, in other cases it merely signals an overcautious investor cutting into his/her own position (Masquelier, 2011). For example, if the main position produces profits as planned, then the hedge in this context would be an unnecessary expenditure. If I were an investor, I would question the benefit of the original investment in this way.
Indeed, there are so many different types of risks in today's challenging business environment. Thus, I believe that hedging can be considered as the most common but also most appropriate strategy that can be used used to manage these different types of risks. I really liked the fact that you have explained the different sides of the hedging strategy. For one more time you explained everything very well, good job!
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