Question

. Should multinational firms hedge foreign exchange rate risk? If not, what are the consequences? If so, how should they decide which exposures to hedge? Distinguish between transactional, translational and competitive exposures. ? What decisions have to be made to implement a hedging policy?

Answer 1

FX Hedging:
FX Hedging is based on a company’s risk appetite and objective. Generally, almost all MNCs Hegde FX risk since certain fluctuation can lead to companies being in an uncompetitive position. Additionally, it can be determinantal to their financial statement. There are three types of FX risk –

Transactional: Hedging P&L exposure

Translation: Hedging Balance sheet exposure

Competitive: Hedges created to ensure a company does not get into an uncompetitive position with another companies
While creating a hedging policy, it is very important for an organization to determine what risk it wants to hedge. Also, companies need to realize that hedging is only a tool to protect them against FX risk not a tool to make money. Any profits from FX is basically offset by a loss in the business.