Question

Discuss difficulties in hedging operational exposure

Answer 1

There are many difficulties in hedging operational exposure because of uncertain cash flows due to fluctuation in exchange rates. Operational exposures are generally long-term in nature and fluctuation in currency rates makes it more volatile, so there are difficulties in hedging operational exposure. The multinational companies operating in different countries and dealing with many currencies find it difficult to hedge their operational exposure because of uncertainty in exchange rates of their respective currencies.