Strategic Financial Managament Essay

3670 words - 15 pages

Hedging is a risk management strategy used in limiting or eliminating chances of loss from uncontrollable changes in the prices of commodities, currencies, or securities. A hedge is an investment position that used to reduce potential losses that may be occur in an investment for an individual or an organisation. In short, hedging is a transfer of risk without buying insurance policies. Hedge funds are designed to reduce an investment risk while maintaining a good return on investment.

Hedging refers to managing risk to an extent that makes it bearable. In international trade and dealings foreign exchange play an important role. Fluctuations in the foreign exchange rate can have ...view middle of the document...

5 dollar per pound. However, since the exchange rate could fluctuate and end with a possible depreciation of US dollar, Wates enters into a forward agreement with Bank of America to fix the exchange rate at 1.5 dollar per pound. The forward contract is a legal agreement, and therefore constitutes an obligation on both sides. The First State Bank may have to find a counter party for this transaction – either a party who wants to hedge against the appreciation of 1,500,000 dollars expiring at the same time or a party that wishes to speculate on an upward trend in dollars. If the bank itself plays the counter party, then the risk would be borne by the bank itself. The existence of speculators may be necessary to play the counter party position. By entering into a forward contract Wates is guaranteed of an exchange rate of 1.5 dollar per pound in the future irrespective of what happens to the spot dollar exchange rate. If Dollar were to actually depreciate, Wates would be protected. However, if it were to appreciate, then Wates would have to forego this favourable movement and hence bear some implied losses. Even though this favourable movement is still a potential loss, Wates proceeds with the hedging since it knows an exchange rate of 1.5 dollar per pound is consistent with a profitable venture.

Forward Contract
Pros | Cons |
Can be tailored to the specific requirements of a customer | Not marketable as it is negotiated between two parties only |
Has also no payable front-end fee as nothing is payable or receivable until settlement date | Binding agreements that must be settled at the settlement date as it is an obligation |
Required no borrowing or lending of capital | Do not allow either party (buyer or seller) to take advantage the favourable moment of the price anymore |
It is an over-the-counter (OTC) instrument | More expensive than comparable futures contracts |
Private deals between two individuals | Lack of liquidity |
Lower information and transaction cost | Difficulty to find a counter party |
| Subject to default risk |
| OTC are generally not opaque |

Article Links
Financial Derivative
http://wps.aw.com/wps/media/objects/7529/7710171/bonuschapters/webch02.pdf

Importance and benefits of Hedging
http://www.mcxindia.com/knowledgehub/Occasionalpapers/PDF/Benefits_of_Hedging.pdf

How Does a Forward Contract for Commodities Work?
http://smallbusiness.chron.com/forward-contract-commodities-work-14035.html

Pros
There are many advantages of hedging with forward contract. Unlike futures, forward contract can be tailored to the specific requirements of a customer. They can be as flexible as the parties involved want them to be. It has also no payable front-end fee as nothing is payable or receivable until settlement date. Besides that, it required no borrowing or lending of capital. Forward contracts do not trade on a centralised exchange and are therefore regarded as over-the-counter (OTC) instruments. ...

Other Essays Like Strategic Financial Managament

Comparing The Moral Virtues Of Antony And Julian The Apostate

1103 words - 5 pages Roman emperor Julian the Apostate and Christian leader Antony both exhibited many qualities of character during their existence. Both of them led very distinctive lives although shared several ethical values. Book 25 of “The Later Roman Empire” and the book “Early Christian Lives” show concrete evidence of this. In the following essay, I will argue how both leaders’ lives were devoted to their religious beliefs and their mutual cardinal virtues

Living In A Cashless Society Essay

1637 words - 7 pages join them.” Nevertheless, as financial institutions are implementing debit cards, internet banking, and credit cards, more people are beginning to accept it. In order for each and everyone us to benefit fully from this program or “cashless society,” we need to have basic idea about the pros and cons of cashless society. The question of whether the world should become a cashless society is a tough question to answer and hard to boldly say yes

The French And Indian War: The "Real" First World War

1955 words - 8 pages The Seven Years War, or more commonly referred to as “The French and Indian War”, has been called the true First World War. In this book The French and Indian War: Deciding the Fate of North America, the author and historian Walter R. Borneman paints a detailed and elaborate picture that justifies the claim of it being the first true war of global proportions. If ever there truly was a climax to the never ending feud of the European powers

Is The Use Of Animals In Medical Research A Necessary Measure?

1513 words - 7 pages Throughout history, animals have been used in experiments to test product safety and obtain medical knowledge that benefits both humans and animals alike. Every year there are numerous medical breakthroughs, such as medications and surgical instruments, which are tested on animals to insure their safety before they are deemed acceptable for human use. Even though the results of the experiments saved millions of human lives, they are also

Education And The Evolving Job Market

2363 words - 10 pages The lives of students today are changing. They are preparing for lives and jobs that have never before existed. If teachers hope to have a significant and worthwhile impact on these quickly changing lives, they must change the way they think, prepare, and instruct our future generations. Children cannot afford to have teachers who remain stagnant in their methods and ideals. Students crave instructors that are willing to allow them to tap

Young And Relentless

1737 words - 7 pages financial burdens to their children. In addition, among the growing number of HIV diagnoses in the U.S., young teens have joined the list of groups most vulnerable to infection. In pushing condoms as a solution, we have overlooked some of the most serious consequences of early sexual activity, and effectively hidden others” (Witherbee 6). When parents give an effort to talk to teens about sex, the sexual activity can be lowered and decrease a

The Natural Law Theory

1231 words - 5 pages Obeying by the natural law theory is the only true and moral way to live life; especially a life lived in God’s image. God’s presence is a guiding factor to obtaining a moral and virtuous life, which can only be obtained by following the natural law theory. God created a set of laws as a supreme guide for humans to live life, like any law these laws were created to ensure wellbeing for everyone. The laws he created are the civil law, the natural

Resolved: Presidential Signing Statements Threaten To Undermine The Rule Of Law And The Separation Of Powers

1811 words - 8 pages The subject of signing statements has created much debate among the houses of Congress, government officials, and the public alike. These signing statements fall under the categories of constitutional and legislative history signing statements. Constitutional signing statements are those in which the president deems certain provisions of the legislation as unconstitutional, therefore they should not be enforced (Bradley & Posner, 2006

Oppressive Systems Of Government In Egypt And Animal Farm

1529 words - 7 pages As in Egypt, Orwell demonstrates through his allegorical novel “Animal Farm” that leaders are able to establish and maintain power over a people, and in turn create an oppressive and corrupt government system. Orwell shows the significant difference in the education and levels of knowledge in the animals, and how the government takes advantage of this difference. The split between the levels of intelligence is portrayed in the first chapter when

The Pathway To Psychosis

1415 words - 6 pages “How all occasions do inform against me” is a line from act IIII, scene IIII of William Shakespeare’s Hamlet. This line, spoken by Hamlet, expresses his emotional state as he is currently overwhelmed by the death of his father, the king of Denmark, and the situation surrounding it. After Hamlet learns of his father’s death he finds out that his mother has married Claudius, Hamlet’s uncle. On top of all of that, Hamlet soon after

Rated “M” For “More Censorship Not Needed”

1241 words - 5 pages Since the moment video games became a commercial success there have been people who have pushed for unfair amounts of censorship to be placed upon the content of the games and its availability to children. These groups push for increased regulations on content but there is already an appointed group to handle this issue, the ESRB. Even though there has been an increase in mature content in the video game industry, increased censorship is not

Related Papers

The Lego Group Essay

1951 words - 8 pages Assignment 1: The Lego Group 1. Explain how the development of strategy at the LEGO Group reflect the key characteristics of strategic management outlined in section 1.2 and in the model in Figure 1.4 First of all, in order to explain the strategic management, the strategy model needs to be taken into account (Figure 1.4). It encompasses three key sections, namely the strategic position, the strategic choices and strategy into action. When

Business Communications Essay

4651 words - 19 pages being viewed by all the 5,000 employees of the company virtually. Employees can mark their attendance and express their views via Chatter. ------------------------------------------------- Hence, This Blog writing exposed the substantial role of frontrunner to driving the team to reach the business duty that the leading strategic is equilibrium and equally is the fundamental part for the group inventiveness as the team with various memberships

The Separation Of Capital Ownership And Control

1577 words - 7 pages Wealth of Nations, 1776, Modern Library, Cannon Ed., New York. Jensen, M. C., and Meckling, W. H., (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics 3: 305-360. Fama E. F., (1980), Agency Problems and the Theory of the Firm, The Journal of Political Economy, The University of Chicago Press. Macey J. R. (2008), CORPORATE GOVERNANCE AS PROMISE, Corporate Governance, Princeton University Press.

The Versatility And Flexibility Of Oled's

1014 words - 5 pages In April 1, 2002, organic light emitting diodes gain rise in the scientific community with their published, more practical form at Ames Laboratory. “Scientists at the U.S. Department of Energy's Ames Laboratory, in collaboration with scientists at the University of Michigan, Ann Arbor, have developed and demonstrated a novel, fluorescence-based chemical sensor that is more compact, versatile and less expensive than existing technology of its