What is a good response to.... A hedge is something an investor can use to mitigate risk while pursuing many different types of investments. There are also differing types of hedges. A cash flow hedge is designed to manage the risk of variability in future cash flows related to forecasted transactions. It stabilizes expected cash flows by using financial instruments to lock in rates or prices (Hoyle, 2024, p. 337). An example out of our textbook involves a company expecting to purchase raw materials in the future entering into a forward contract to lock in the current exchange rate, reducing the risk of fluctuations in currency rates (Hoyle, 2024, p. 340). A fair value hedge aims to offset the risk of changes in the fair value of an existing asset or liability due to market fluctuations. This hedge stabilizes the value of recognized items on the balance sheet (Hoyle, 2024, p. 313). A company holding a fixed-rate bond may use an interest rate swap to hedge against the risk of fluctuating interest rates. A net investment hedge protects against the risk of currency fluctuations affecting the value of an investment in a foreign subsidiary. According to the book, it addresses the risk associated with translating the net assets of a foreign subsidiary into the reporting currency (Hoyle, 2024, p. 327). For example, a U.S. company with a subsidiary in Europe might use a foreign currency loan to hedge its investment in the European subsidiary, thus mitigating the risk of adverse movements in the euro against the U.S. dollar (Hoyle, 2024, p. 330).
What is a good response to....
A hedge is something an investor can use to mitigate risk while pursuing many different types of investments. There are also differing types of hedges.
A cash flow hedge is designed to manage the risk of variability in future cash flows related to
A fair value hedge aims to offset the risk of changes in the fair value of an existing asset or liability due to market fluctuations. This hedge stabilizes the value of recognized items on the balance sheet (Hoyle, 2024, p. 313). A company holding a fixed-rate bond may use an interest rate swap to hedge against the risk of fluctuating interest rates.
A net investment hedge protects against the risk of currency fluctuations affecting the value of an investment in a foreign subsidiary. According to the book, it addresses the risk associated with translating the net assets of a foreign subsidiary into the reporting currency (Hoyle, 2024, p. 327). For example, a U.S. company with a subsidiary in Europe might use a foreign currency loan to hedge its investment in the European subsidiary, thus mitigating the risk of adverse movements in the euro against the U.S. dollar (Hoyle, 2024, p. 330).
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