In designing a hedging strategy, firms might do well to consider a short-term strategy, an intermediate-term strategy, and a long-term strategy. What characterizes each horizon? What would be an appropriate hedging strategy for each horizon?
In the short term, the strategy of hedging is to control the risk by managing the exposure in the spot market.
For instance, if a foreign exchange payment is expected in six months time and if the foreign exchange rate is expected to move sharply in an adverse manner, the exposure may be managed by purchasing a call option maturing in six months.
The time horizon of short term exposure is usually limited to a maximum of one year. ...
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