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Explain why all risks cannot be hedged. Give an example of a risk that cannot be...

Explain why all risks cannot be hedged. Give an example of a risk that cannot
be hedged.

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Answer #1

Major risks related to any firms are financial risk and operating risk. Hedging of risk means taking a counter position of the assets through different derivative products. For example, financial risk may arise interest cost of a firm may arise due to rise in interest rate. This can be hedged by interest rate swaps or derivatives. While operating risks are related to the firms business model. For example a firm deals in computer laptops motherboard. If a competitor launch a superior product the firm may face a loss. But this type of risk can not be hedged. So risks like operating risk can not be hedged all time.

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