Hedging and Risk Management (Essay Sample)

Hedging and risk management
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Hedging is a risk management procedure aimed at limiting the likelihood of loss from fluctuations in the prices of commodities, currencies, or securities. Hedging is a transfer of risk without purchasing an insurance policy. Considering the losses experienced by GM in Japan, the company should hedge before entering Russia (Lessambo, 2013).
Hedging before entering Russia will ensure the continued flow of cash for GM. Price instability has an unfriendly impact on the income streams and can upset money streams. Hedging protects organizations from such unpredictable value developments, and guarantees continuous and stable income streams.
According to lessambo (2013), Hedging can encourage capital investment in the new market. By locking input costs, GM will have the capacity to secure itself against the rising operating expenses, and hence, makes solid arrangements for capital development and extension.
Considering Russia is a new market for GM, hedging will lower its tax liabilities. This is the most visible strategic reason for hedging among large firms, the immediate impact tax liabilities on firms. Russia is a new market with a completely new taxation system (Lessambo, 2013).
Hedging before entering Russia will ensure good governance in the company (Lessambo, 2013). In case of a disagreement between the GM managers and the shareholder, on risk management policies, hedging permits a way out of this dichotomy. By driving a wedge between risks that are external to the firm from those that are internal and afterward building a well thoroughly considered out Risk Management Policy that looks to exchange avoidable dangers out of the firm in a straightforward way, hedging can outline between the two sorts of risks. Hedging will also enable GM investors to segregate between legitimate and reckless risk-taking, management behavior in the new market.
I conclude that GM should hedge before entering Russia for this will put the company in a better position to compete reducing risks and challenges in a new market. Hedging will also enable the company to avert losses it has experienced in the other market such as Japan.
FX risk is the risk of investment worth changing because of changes in cash trade rates. The risk that an investor will need to finish off a long or short position in an outside cash at a misfortune because of an unfavorable development in return rates. There are different ways of hedging FX risk.
A currency swap is one of the methods and it involves parties (Lessambo, 2013). The involved parties agree to swap the equal amount of money (called the principal) and the interest rates over a fixed period. The principal is usually a loan or a credit to one of the involved parties. Interest rates are swapped at one-year intervals and this...