Corporate hedging strategies
Medium to large corporations often seek hedging strategies for risks related to their line of business. While these risks can vary widely, they are typically related to FX exposure (generated from supply or sales), raw materials (due to stock accumulation or shrinkage) and liability management (loans, debt, etc).
Depending on the significance of the corresponding risk, corporations should seek active hedging strategies to mitigate these risks.
However, not all corporations seek active hedging. When underlying assets move in their favor, a hedging strategy is typically avoided especially in corporations where there is no structured treasury department that manages these risks. Typically, in downtrend markets corporations will seek hedging after having experienced the negative impact of the underlying risk. This translates to significant losses and bad timing.
Additionally, corporates are sometimes hesitant to engage in active hedging as in many times seems complicated, cumbersome and difficult to manage
In KM Cube we advice companies to outsource their hedging strategy by:
- Helping them to estimate their risks with state-of-the-art risk management tools
- Find appropriate hedges to approximate the risk at hand. This involves correlation tools to find the best proxy as well as liquidity considerations
- Hedging strategies using the futures or options markets
- Open corporate account in prominent brokerage companies that give access to markets at hand
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