understandig the working process in finance dacision making

May 28th, 2015
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Abilene Christian University
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One reason why companies attempt to hedge these price changes is because they are risks that are peripheral to the central business in which they operate. For example, an investor buys the stock of a pulp-and-paper company in order to gain from its management of a pulp-and-paper business. She does not buy the stock in order to take advantage of a falling Canadian dollar, knowing that the company exports over 75% of its product to overseas markets. This is the insurance argument in favour of hedging. Similarly, companies are expected to take out insurance against their exposure to the effects of theft or fire.

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IMPORTANCE OF HEDGINGCorporations in which individual investors place their money have exposure to fluctuations in all kinds of financial prices, as a natural by-product of their operations. Financial prices include foreign exchange rates, interest rates, commodity prices and equity prices. The effect of changes in these prices on reported earnings can be overwhelming. Often, you will hear companies say in their financial statements that their income was reduced by falling commodity prices or that they enjoyed a windfall gain in profit attributable to the decline of the Canadian dollar.This article will give a brief overview of the different ways in which firms approach this financial price risk and it will introduce the rationale for using derivative products. While there has been a great deal of negative attention paid to derivatives in the mainstream press, the opportunities they provide make derivatives a necessary part of the future of any corporation. Future articles in this series will identify the benefits and drawbacks of individual derivatives structures and explain some of the breakdowns in the application of derivatives by corporate end-users.One reason why comp

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