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    Risk Factors and Hedging

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    1. What are the types of risk factors that a company faces?

    2. If risk aversion cannot explain why firms choose to hedge, then what are their motivations?

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    1. What are the types of risk factors that a company faces?

    A risk is defined as a possible event or circumstance that can have negative influences on the company. Its impact can be on the very existence:
    - The resources (human and capital),
    - The products and services, or
    - The customers of the company,

    The risk has also external impacts on:
    - Society,
    - Markets, or
    - The environment.

    In a financial institution, company risk management is normally thought of as the combination of:
    - Credit risk,
    - Interest rate risk or asset liability management market risk, and
    - Operational risk.

    Companies in which individual investors place their money have exposure to fluctuations in all kinds of financial prices, as a natural by-product of their operations. Financial prices include:
    - Foreign exchange rates,
    - Interest rates,
    - Commodity prices and
    - Equity prices.

    The effect of ...

    Solution Summary

    The types of risk factors that a company faces are explained. Firms' motivations for choosing the hedging are explored.