Financial and operational hedging techniques essay

For consistent and stable cash flows.

Financial and operational hedging techniques essay

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LinkedIn Exchange rates play an important role in determining corporate profitability and competitiveness. The current strength of the Canadian dollar poses unique risks and opportunities for Canadian companies with global supply chains and those who sell in many geographic markets.

Specifically, firms must manage having their revenues denominated in Canadian dollars and their costs denominated in other currencies.

Financial and operational hedging techniques essay

Exchange rate fluctuations, specifically a steep fall in the loonie, will introduce significant variability in costs and revenues potentially wreaking havoc on profitability, competitiveness and shareholder value.

While there are solid benefits to a strong dollar e. Managers would be wise to pursue a more holistic and longer-term approach to risk management, with particular attention paid to operational strategies.

Financial and operational hedging techniques essay

The loonie is at a record high versus key foreign currencies. S counterpart on average this year for the first time in three decades. The currency averaged Is a strong loonie sustainable in the long term? The larger the overvaluation and the longer it is sustained, the greater the business risk.

A rapidly falling loonie will have serious implications for Canadian firms with outsourced production including higher input raw material, labour and transportation costs, a potential loss of domestic market share versus domestic producers and eroding profit margins. There are many macro-economic and political reasons why the loonie could drop quickly and precipitously.

Ongoing uncertainty around the European debt crisis as well as a slowdown in Chinese growth may dampen the global economy and demand for the commodity-driven loonie.

Financial and Operational Hedging Techniques | Essay Example

Canadian fiscal performance may hit the skids plus there remains the potential for falling interest rate spreads versus the U. Finally, continued political instability in the Middle East and Asia threatens to create instability in the currency markets.

Canada is a relatively small currency market and is not a safe haven for international investors in times of turmoil. When fear grips markets, flight-to-safety flows hurt the loonie. In an integrated global economy, companies face strong interdependencies across their risk categories — strategic risks, operational risks, financial risks and external risks — which can quickly degrade their competitive position, limit decision-making flexibility and shrink operating margins.

Traditional financial hedging tools, designed to smooth out short-term cash flows, are often insufficient or too expensive to address large and sustained exchangerate shifts. Managers would use operational hedging strategies in conjunction with financial hedging to pre-empt or mitigate the effects of a large, exchange rate-triggered change in their cost structure, customer demand and competitiveness.

Firms should approach operational hedging in a systematic fashion by: In terms of operational hedging, strategic choices could involve evaluating the location of production facilities, sources of raw materials, pricing strategies, logistics networks, and how sales and marketing channels by geography are organized.

When deployed proactively and carefully, operational hedging can be a powerful tool to minimize the impact of major currency shifts on costs and revenues, while enabling firms to potentially leapfrog less-agile competitors.

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Financial hedging techniques Essay Example | Topics and Well Written Essays - words

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Financial and Operational Hedging Techniques | Essay Example