Question

The decision to hedge or not hedge depends upon what factors for a firm with foreign exchange exposure (risk).

Answer 1

The decision to hedge or not hedge depends upon the following factors for a firm with foreign exchange exposure (risk):

• The view of the exchange rate in future. Hedge is required only if our view is that the exchange rate may move against us
• The cost of hedging. Hedging is not free. Buying options cost money, may be more money during a very volatile environment. Hedging with futures may result in cash outflow during the contract period to meet the mark to market losses.

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