521 Module 3 Discussion

Some companies refrain from using financial derivatives to manage their foreign exchange exposures. They consider derivatives such as forwards, futures and options as speculative. They also believe the long-term effect is the same regardless of whether a firm hedges since hedging results in gains sometimes and losses other times.

Write an initial post addressing the following:

• Do you agree with these companies? Why or why not?
• If you are faced with currency exposures in your business, will you hedge? If so, how will you hedge?

Respond to Peer Discussion Post below.

Some companies view financial derivatives as speculative, but when used correctly, they are vital for risk management in global markets. These tools, like futures and forex, aid in financial planning, especially against currency exposures. While hedging can have varying outcomes, its primary purpose isn’t speculation but stability through risk management.

I understand the concerns of some companies regarding the speculative nature of financial derivatives. However, I disagree with the idea of refraining from their use entirely. Financial derivatives, when used appropriately, can be a valuable tool for risk management, rather than speculation.

From my perspective using financial derivatives can significantly enhance a company’s ability to minimize losses and increase profits or company value. This is especially relevant for companies operating in global markets where there are many more variables. The use of financial derivatives, such as futures and forex, allows for better planning of financial indicators. For smaller domestic companies, this might be less relevant, but even so, it can allow for more precise financial and operational planning. Despite potential price fluctuations, such tools can minimize losses or plan for operational loading.

If faced with currency exposures in my business, I would indeed consider hedging to reduce potential risks. The method of hedging would depend on the specifics of the exposure, the business environment, and other risk factors. For short-term exposures, I might utilize forward contracts. For longer-term exposures and where I believe there might be significant currency fluctuations, options could be a more suitable instrument, as they provide flexibility and define potential losses. In essence, it’s not about speculating but managing risks to ensure stable operational and financial performance.