As the executive of a manufacturing firm that receives supplies from 18 different countries and sells products to 24 countries, your success and failure is determined by exchange rates, which cause frequent fluctuations in the price of supplies and the sale price of manufactured goods. Considering both the pros and cons of currency hedging and strategic hedging, which strategy would you opt for? How would you justify this decision to other executives and to shareholders?
As the executive of a manufacturing firm that receives supplies from 18 different countries and sells products to 24 countries, your success and failure is determined by exchange rates, which cause frequent fluctuations in the price of supplies and the sale price of manufactured goods. Considering both the pros and cons of currency hedging and strategic hedging, which strategy would you opt for? How would you justify this decision to other executives and to shareholders?
A method or approach used to lower the risks connected with international investments is currency hedging. This tactic can shield traders and investors from the Indian rupee's decline against the dollar and other important currencies.
Financial institutions that offer hedging services bill clients with a hedging premium. These organizations also offer currency exchange services to investors and exporters. This enables the buyer or exporter to convert their profits at the currency rate in effect at the time the hedging contract was entered into.
Strategic hedging is a tactic used to safeguard investment in an exchange rate against a negative change. When a dealer is worried about news or an event sparking volatility in currency markets, it is often a type of short-term protection. When referring to safeguarding currency exchange pairs in this manner, there are two similar tactics. A hedge can be set up by taking the opposite position in the same currency pair, and buying forex options is a second method.
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