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 #2: Risk is Absolute.
On the contrary, the perception of how risky an exposure is depends on who you ask, since risk is relative and depends on a company’s (their stakeholders (stockholders, creditors, employees, retirees, etc.) appetite for it. Every organization, even those in similar competitive markets, may approach risk management differently. One firm’s risk appetite, or more specifically, its capacity to absorb risks, can depend on several factors, including: Its business (why it’s in a particular market or product); financial or operating leverage (how much debt or other fixed cash obligations it must endure); liquidity reserves or access to liquidity (its ability to absorb cash flow volatility); or ownership (whether a company is public or private). It’s not always practical to do just what another firm is doing since one approach may not be relevant to another company’s situation. DWS