The right way to hedge Risk
Deciding how and what to hedge requires a company-wide look at the total costs and benefits of Risk online
JULY 2010 • Bryan Fisher and Ankush Kumar
Source: Risk Practice
In This Article
Exhibit 1: Direct costs account for Risk online only a fraction of the total cost of hedging.
Exhibit 2: Companies should develop a profile of probable cash flows—a profile that reflects a company-wide calculation of risk exposures and sources of cash.
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Hedging is hot. Shifts in supply-and-demand dynamics and global financial turmoil have created unprecedented volatility in commodity prices in recent years. Meanwhile, executives at companies that buy, sell, or produce commodities have faced equally dramatic swings in profitability. Many have stepped up their use of hedging to attempt to manage this Risk online volatility and, in some instances, to avoid situations that could put a company’s survival in jeopardy.
When done well, the financial, strategic, and operational benefits of hedging can go beyond merely avoiding financial distress by opening up options to preserve and create value Risk online as well. But done poorly, hedging in commodities often play Risk online overwhelms the logic behind it and can actually destroy more value than was originally at risk. Perhaps individual business units hedge opposite sides of the same risk, or managers expend too much effort hedging risks that are immaterial to a company’s health. Managers can also underestimate the full costs of play Risk onlinehedging or overlook natural hedges in deference to costly financial ones. No question, hedging can entail complex calculations and difficult trade-offs. But in our experience, keeping in play Risk online mind a few simple pointers can help nip problems early and make hedging strategies more effective.