PART 3
Misconceptions About Hedging (continued) – This post is a continuation of a previous series of posts on the various misconceptions about hedging. Over the next several BLOG posts I will raise a particular misconception about hedging and provide an alternative viewpoint. If you have an agreeable or a counter viewpoint, then feel free to respond either on the post or email me directly at DStowe@StrategicTreasurer.com .
Misconception about hedging #3:Risk Management Equals Hedging.
Not necessarily. Hedging, or offsetting one’s exposure with an opposing financial position for example, is just one choice in the risk management process. There are three primary choices in addressing risk: Accept it (it’s within your risk appetite), avoid it (you can’t endure it or you choose not to), or manage it, which focuses on either / both changes in operational management or hedging. If you choose not to accept or can’t avoid the risk, then managing it begins at the operational level. Specifically, where can firms reduce their exposure, i.e. make changes in their production inputs, product markets, pricing and/or consumption levels to mitigate exposure? Once undertaken, it’s the residual risk, or the risk remaining, that should be the focus for hedging, only if this risk is still not within the company’s risk tolerance level. Further, hedging should be undertaken to the extent that it brings this residual risk within a firm’s risk appetite. DWS