Question

What are the risks if a fortune 500 company takes no hedging position with options, futures, or forward rates (with international currencies like the euro?

Answer 1

Hedging is a method of reducing risk of adverse price movements in security investment or asset. It is similar to insurance and hedging through derivatives is a common strategy adopted by large Corporates. Sensor Fortune 500 company would have huge amount of transactions in foreign currency any adverse price movement in the currency would seriously affect the profitability of the company. No hedging position will hence leave the company exposed to huge risk and so it should be avoided. In this scenario if there is a rise in the currency such as euro and hence a fall in the exchange rate, the amount of receivables will be adversely affected. Also the disbursements coming from foreign subsidiaries will reduce due to the lower exchange rate. Conversely a higher amount will have to be paid if the exchange rate rises. Hedging locks in the amounts and avoids such fluctuations.