Briefly describe 1 global risk faced by Walmart. Does Walmart hedge against this risk? Explain.
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One global risk faced by Wal-mart is the transactional foreign exchange risk. Wal-Mart operates worldwide and thus has receivables and paybales in foreign currency. This exposes it to transactional risk. The receivables and payables may not be due right away and may come in/go out in 30-45 days (depending on terms with the supplier/customer). This exposes Wal-Mart to financial transactional risk which must be mitigated.
Wal-mart does hedge against these risks. The paragraph below is from company's 10K which clearly states that Wal-Mart uses financial derivates and instruments to hedge against such risks:
"The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and foreign exchange rates. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company's derivative financial instruments is used to measure interest to be paid or received and does not represent the Company's exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) when appropriate. The majority of the Company's transactions are with counterparties rated "AA-" or better by nationally recognized credit rating agencies. "
From the above paragraph, it is clear that Wal-Mart is using financial derivatives such as put and call options to hedge against the foreign exchange risks.© BrainMass Inc. brainmass.com December 24, 2021, 9:18 pm ad1c9bdddf>