Arguments Hedging

Question 0

Arguments Against Hedging

Answer 0

1. Shareholder arguments
2. Industry argument
3. Treasurer argument

Question 1

Arguments in Favour of Hedging

Answer 1

Performance of corporations affected by changess in market variables (e.g. interest rates, exchange rates, commodity prices).

Hedging techniques eliminate or reduce the impact of these variables so that corporations can mainly focus on their core operating activities.

Question 2

Shareholder arguments

Answer 2

Shareholders don’t need the corporations to hedge because they can hedge themselves.
- But it is more feasible and cheaper if corporations do it.

Rational investors always hold well-diversified portfolios and such portfolios are not sensitive to changes on the values of market variables.
- But not all investors are rational and not all investors hold well-diverified portfolios.

Question 3

Industry argument

Answer 3

If in an industy hedging is not the norm, than the performance of a company that hedges becomes more volatile.

In a competitive industry equilibirium profit margins tend to be similar across different firms and changes in the market variables do not affect the profit margins of these firms.

In this situation there is an impact on the profit margins of hedging firms if market variables change.

Question 4

Treasurer argument

Answer 4

Sometimes treasurers are adverse to hedging because it is difficult for them to justify losses that are made by using a hedging strategy.