Response to Classmates Discussions

Week 2 - Discussion Forum 2

Marc Anthony Reynoso

YesterdayOct 1 at 5:40pm

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Hi class,

 

There are many reasons companies dabble into hedging foreign; some come with advantages and others with disadvantages. An advantage is that companies use currency hedging for guaranteeing that a foreign subsidiary's income will not take a big hit in the home currency. As stated by The Wharton School, "the result of a huge currency move ensures that various payables or receivables do not veer far from projections, and significantly disrupt cash flows, revenues or expenses (The Wharton School, 2013). Hedging is great for financial planning, but there are influences in the volatile currency. There are risks from political uncertainty, global funding flows, the timing of revenue collections, and other transactional activity may be difficult to predict when undertaking to hedge foreign currency. Disadvantages include volatility in the short term, with no significant impact on long-term volatility. Hedging currency could also be largely redundant. Many companies have global operations with exposure to different currencies, and hedging their currency provides exposure directly. Finally, hedging is costly and can introduce unwanted leverage to a portfolio (Olsson, 2015). When considering hedging, it is vital to understand the moving variables. Moreover, To protect against agave prices' uncertainty, a corporation can enter into a futures contract. A futures contract is a type of hedging instrument that allows the company to buy the agave at a specific price at a set date in the future (Olsson, 2015). It is also important to understand the volatile market and how that can potentially affect hedging outcomes. After reviewing the TED talk and analyzing the thoughts Dalio expressed, I believe he would challenge me to dig deeper into my answer. If I were opposed to hedging foreign currency, Dalio would challenge me and ask why, and based on my answer; he would then provide his honest feedback. The conversation will either end with a back and forth due to exchanging ideas or end in agreement (or disagreement) into expanding in hedging foreign currency. Radical transparency is vital to building and preparing foreign exchange strategies.

 

-Marc Anthony 

 

References:

Olsson, C. (2015, June 9). Four Reasons Why We Do Not Hedge Against Currency Volatility. https://www.advisorperspectives.com/articles/2015/06/09/four-reasons-why-we-do-not-hedge-against-currency-volatility (Links to an external site.). 

 

The Wharton School. (2013, June 12). Should Companies Hedge Currency Risk? Knowledge@Wharton. https://knowledge.wharton.upenn.edu/article/should-companies-hedge-currency-risk/ (Links to an external site.). 

Jason Stack

YesterdayOct 1 at 6:21pm

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Foreign Exchange Strategies

          Hedging is a common practice in international organizations that must exchange goods or currency from one nation to another. Zimmer (2020) suggests that hedging is a risk management tool that organizations use to mitigate losses (pg. 1). For example, if we were to start a new automotive manufacturing facility in Mexico, it would be necessary to invest a significant amount of capital resources (money) into the new facility location. The organization would have to exchange USD into Pesos to hire construction companies, engineering firms, and materials to begin. However, there might be several months between the project approval and the actual start. The organization's financial advisor may suggest hedging the funding ahead of time if the foreign exchange rate between USD and Peso looks unstable. This is one example of hedging, but hedging might not look attractive for other organizations that do extensive international trading.

            Hedging can be a valuable loss mitigation tool for international businesses that infrequently invest large sums of goods or currency across borders. However, for organizations such as Walmart that are frequent international traders, this is not always the best solution. For Walmart's situation, the hedging strategy would be a constant loss due to the inherent safety factor the hedging company is giving for the transfer. Additionally, with the volume and number of facilities that Walmart holds worldwide, it would have to staff a significant number of people to manage all of the international transactions that happen so frequently. Therefore, for organizations that frequently trade internationally, a regular hedging practice would be less economical. What does that mean for the REI Coop expansion into Sweden?

            Suppose we take the information learned from Ray Dalio and his lecture on algorithmic decision-making used to build a radically transparent organization. In that case, we will apply a relatively new analytic approach toward business (Dalio, 2017). Ray Dalio and his colleagues rate each other in meeting and discussion groups to develop a collective business decision. If we take this same approach toward our REI Coop expansion into Sweden, the executive board and team members will follow the same pattern. We must have extensive decisions about entrance strategies, hedging, location, and other issues, but the overall strategy would be based on the algorithmic analyzed data collected from each member. Once collected, the recommended strategy would be presented to the executive board for approval or modification. This technique is radical but opens great possibilities toward optimal decisions making processes for organizations.    

 

References

Dalio, R. (2017, April).  Ray Dalio at TED2017: How to build a company where the best ideas win (Links to an external site.) (Links to an external site.)  [Video file]. Retrieved from https://www.ted.com/talks/ray_dalio_how_to_build_a_company_where_the_best_ideas_win

Zimmer, S. M. (2020). Hedging. Salem Press Encyclopedia.