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Risk Factors and Hedging

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.