You work for Leo Ltd which has recently expanded overseas and for whom foreign currency purchases comprise an increasingly significant proportion of their business, both in terms of number of transactions and in terms of value. Because this is a recent development for your company, there is limited knowledge within the organisation regarding foreign currency risk mitigation. Hence, your line manager has asked you to provide a brief report outlining the advantages and disadvantages of undertaking hedging activities.

Required

A report which addresses the following areas:

• The purpose of hedging foreign exchange risk.
• The changes Leo Ltd will need to incorporate to their company if their policy changes to one of undertaking foreign exchange risk mitigation techniques.
• The benefits to Leo Ltd if they undertake foreign currency risk mitigation techniques.

You should conclude with a recommendation advising as to whether or not the company should undertake hedging activities for its foreign currency activity.