Pros And Cons Of Hedging

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Literature review
Advantages:
There is a large set of literatures about pros and cons of hedging. The first advantage of hedging is minimizing foreign exchange rate risk. Firms will increase their use of foreign exchange derivatives to hedge against the negative effects of currency risk directly related to their operations (Menon, S., & Viswanathan, K. G., 2005). Exchange rates risk is one of the major problem that face by the non- financial companies. Changes in exchange rate will influence volume of foreign trading, the costs of foreign purchasing, profile and the structure of foreign markets in which the company operates in the long run effect. Exchange rate changes could affect profit margins, through their effect on sources for inputs, markets for outputs and debt, and the value of assets (Papaioannou, M. G., 2006). The operational hedging appears to be robust to increased exchange rate volatility suggests that firms without (or with limited) operational hedges should carefully consider the possibility of using this more robust protection against foreign exchange risk (Hutson, E., & Laing, E., 2014). So, the hedging can be used as a risk management tool by the investors to minimize the foreign exchange risk.
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Hedging will be used to lock the price when a manufacturer decides to offset risks due to the fluctuations in the prices of material raw in financial market. “The pricing strategy was named as the most popular operational hedging strategy used by the companies. When it comes to the adoption by the companies various real actions as a response to foreign exchange rate fluctuation, the majority of the companies consider a shift of supplier to foreign locations where it is became cheaper to source due to exchange rate changes” (Hansen, M. A., 2009). Efficiency of hedging can be seen when higher volatility of the price movement
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