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Hedging strategies for a company

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What are some hedging strategies a company can use to reduce risk?

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Solution Summary

The expert examines hedging strategies for a company. The hedging strategies used to reduce risk are determined.

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A well-designed hedging program in a company reduces both risks and costs. Hedging frees up resources and allows management to focus on the aspects of the business in which it has a competitive advantage by minimizing the risks that are not central to the basic business. Ultimately, hedging increases shareholder value by reducing the cost of capital and stabilizing earnings. Below are some of the common hedging strategies:
Short Sale Strategy
Short-sale strategy involves selling stock borrowed from a third party. If the stock declines in value, the stock is purchased on the open market at a lower price than the initial sales price. The purchased stock is returned to the third party, and the difference between the initial sales price and subsequent purchase price is taxable profit to the short seller. The short sale can involve stock of a company currently owned in the portfolio. This technique offers perfect correlation because there is a direct offset to declines in the stock and increase in the short sale technique. Often called "short against the box," this hedging technique ...

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Umut Oltulu, MBA
Education
  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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