Individual investors who invest their money in corporations are exposed to all kinds of price fluctuations. These may include foreign exchange rates, interest rates, commodity prices and equity prices. The effect of changes in these prices on reported earnings can be overwhelming, so companies will seek out transactions whose sensitivity to movements in financial prices offsets the sensitivity of their core business to such changes, or hedging. 

Question:

1. Critically examine the arguments for and against the use of hedging as a tool to offset future price risk. You may provide relevant examples that you are familiar with to support your arguments. 

Answer rating: 100% (QA)

Arguments for the use of hedging Reduce risk Hedging allows investors to reduce the risk associated with their investments By using hedging techniques investors can protect themselves against price fl... View the full answer