Dozier Industries
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......2. Alternative Hedges
Hedging operations refer to actions the parties could take in order to minimize the risks. Generally, hedging against a risk consists of taking an offsetting position in a related security, such as a futures contract (Investopedia, 2009). Hedges occur in a wide variety of situations, but are extremely common is situations of international operations. Relative to Dozier Industries current project, various alternatives of hedging are available. The following lines will succinctly present them, ranked by their levels of flexibility (least flexible to most flexible):
Forward contracts they present a mechanism by which the parties involved in international operations set the exchange rate at which a future payment will be made. It is a simple agreement and has the benefit of entirely removing the currency risks for the partners, while transferring it to the bank (ergo, the losses or gains determined by the currency rate fluctuations will be transferred to the banking institution). However, it may at times be difficult to find a partner who desires to sign a forward, and despite their simplicity, they are only limitedly used. The reasons for this may include the fact that there exists no formal institution to handle the operations
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