Finance - Hedging Strategies Assignment Example | Topics and Well Written Essays - 750 words

Finance - Hedging Strategies - Assignment ExampleThe inwardness of hedge strategies is to reduce business risk of infections while deterring the creation of additional risks. Multinational firms encounter a army of risks, particularly as a result of their free-enterprise(a) exposures across the globe. General Motors has along experienced competitive exposure due to the Japanese yen. This exposure has a lot to do with the depreciating Japanese yen. However, the attach to is yet to establish clear guidelines to deal with the competitive risk ca utilize by the yens move depreciation. In essence, the companys hedging strategies do not provide lucid hedging schema guidelines. General Motors treasurer and finance vice-president Eric Feldstein had to establish robust hedging strategies to counter the risk posed by the depreciating Japanese yen. General Motors was incurring substantial losses as a result of market changes with regard to the US dollar and Japanese yen (Desai & Veblen, 2006). General Motors, therefore, sought to slander currency risk to maximize its profitability. GM established a passive policy that involved hedging half of its technical exposures on a regional basis. This means that GMs hedging outline involved a clear distinction between commercial and financial exposures. GM defined its commercial exposures as property flows related to its ongoing business, for instance, payables and receivables and its financial exposures as dividends and debt repayments. The primary purpose of GMs overall hedging dodge was related to its foreign rally risk management policy. This hedging strategy aimed at reducing the volatility between cash flow and earnings by hedging cash flows i.e. transaction exposures only and disregard translation (balance sheet) exposures. In addition, GMs strategy aimed at minimizing the cost, as well as management time devoted to the management of global foreign exchange. This policy was an outgrowth of an internal audit, wh ich showed that resource investment in active foreign exchange management had not direct to substantial operation of passive benchmarks. This led to policy changes, as well as the adoption of a passive approach in place of the active one. Lastly, GMs hedging strategy aimed at aligning the companys foreign exchange management with GMs operation of its self-propelling business (Desai & Veblen, 2006). This move reflected the assumption that financial management needs to conform to the geographic, operational footprint of GMs overlying business. Overall, GMs hedging strategy has effectively reduced its foreign exchange risks, enabling the company to operate efficiently in the Japanese market. JP Morgan is a US-based financial company that rolled out its business in other regions of the world. While companies establish hedging strategies to protect them from risks, particularly future(a) risks, wrong practices can cost massive losses to a company. One such company is JP Morgan, which enjoymentd derivatives as its primary hedging strategy resulting in losses of up to $ 2 billion. JP Morgan adopted the use of risky derivatives rather than less risky bonds used by its competitors such as Bank of America, Citigroup Inc. and rise Fargo & Co. (Griffin & Moore, 2012). The later financial companies do not trade in credit-default swaps with regard to their indexes. However, JP Morgan accumulated massive credit-default indexes, which resulted in, set moves within the financial industry. Unlike JP Morgan, other financial industry players use