Financial hedging techniques - Essay Example

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Hedging is used to offset or limit the probability of a loss occurring as a result of upheavals in the prices of goods, currencies, or securities. Hedging can be…
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Financial hedging techniques
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Download file to see previous pages The approach to decreasing the possibility of a loss from an investment is usually undertaking an additional investment for purposes of upsetting loss in the future. As hedging minimizes the possibility of a loss occurring, it also minimizes the profit potential.
A large firm or corporation is defined differently depending on the country and the industry under which it operates (Fonseca and Rustem 2012: 2530). For instance, a large firm in a developing country may be considered as a small firm or a medium one in a developed country. In addition, a large firm in the retail industry may be regarded as a small firm relatively to a large firm in mineral and mining industry within the same nation. Generally, the size of a firm is determined by considering different organizational aspects including the turnover, the amount of profits made, the number of employees and the number of countries in which it operates. Typically, a large firm employs thousands of employees and may operate in more than one country, have annual revenues more than billion dollars. Large companies also own huge valuable assets spread across different regions within or without a country. All large firms are also considered as autonomous legal entities. This means the owners have limited liabilities. Examples of large firms include Wal-Mart Inc, grocer J Sainsbury, Royal Dutch Shell, SABMiller, Toyota Motors Corporation and The Boeing Company.
Every firm that accepts foreign currency as part of its payment or receipts faces currency risk. Currency risk can be defined as is a type of risk that emanates from the changes in the price of a currency against other currencies. Hedging techniques refers to the different strategies used by firms to minimize the risk on investment. The hedging techniques used vary from one organization to the other depending on the nature of the investment and the size of the company (Wang, Wu, and ...Download file to see next pagesRead More
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