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Global Finance - hedged and mitigated explained

1. What is hedging? Can all risk be hedged and/or mitigated?
Why or why not? Should a multinational organization hedge? Why or why not?

2. What is country risk analysis?
How do you determine the most appropriate techniques or strategies to use in
conducting country risk analysis?
Why do firms engage in country risk analysis and management?

3. How do you determine the most appropriate technique(s) to use for assessing a
country's risk profile?
Which country risk analysis technique would be most appropriate for your
organization to use in assessing its globalization strategy?
If potential returns are high enough, any degree of country risk can be tolerated. Do
you agree with this statement? Why or why not?

Solution Preview

What is hedging? Can all risk be hedged and/or mitigated?
Why or why not? Should a multinational organization hedge? Why or why not?

In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment.

One reason why companies attempt to hedge these price changes is because they are risks that are peripheral to the central business in which they operate. For example, an investor buys the stock of a pulp-and-paper company in order to gain from its management of a pulp-and-paper business. She does not buy the stock in order to take advantage of a falling Canadian dollar, knowing that the company exports over 75% of its product to overseas markets. This is the insurance argument in favour of hedging. Similarly, companies are expected to take out insurance against their exposure to the effects of theft or fire.

By hedging, in the general sense, we can imagine the company entering into a transaction whose sensitivity to movements in financial prices offsets the sensitivity of their core business to such changes. hedging is not a simple exercise nor is it a concept that is easy to pin down. Hedging objectives vary widely from firm to firm, even though it appears to be a fairly standard problem, on the face of it. And the spectrum of hedging instruments available to the corporate Treasurer is becoming more complex every day.

Another reason for hedging the exposure of the firm to its financial price risk is to improve or maintain the competitiveness of ...

Solution Summary

What is hedging? Can all risk be hedged and/or mitigated?

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