Currency Hedging Draws Both Advocates, Opponents – Article Example

Currency Hedging Draws Both Advocates and Opponents Currency hedging is a financial aspect in the trade of international funds that involves the use of contracts for both the buying and selling of other currency at a specific price at some point in the future, with the major aim of reducing risk in a portfolio. To a given extent currency hedging usually involves some aspect of risk taking such that a financial institution manager who predicts that there might be a decline in value in the sale of certain currency in the near future, decides to set a specific price for such a currency for the later date, which ensures that the value of the said currency later falls as predicted, there would be a gain for the institution. Based on such a perspective, it is ideal that as the top management at headquarters, it is proper to get involved in currency hedging.
Failure to engage in currency hedging has some aspects of negative aspects attributed to it, and those that make it essential for financial institution managers or even top managements to engage in currency hedging. An aspect associated with the same is that stock mutual funds, which offers an alternative to currency hedging, frequently offer only vague descriptions of the policies in their prospectuses, thereby creating doubts on the profitability associated with such ventures. Avoidance of currency hedging increases vulnerability of an institution’s funds in the international financial market transactions.
Despite the positive aspects of currency hedging, there are some disadvantages associated with the practice. These involves the currency forward contracts that are usually involved, and which usually cause some negative attributes especially in instances in which there is decline in sales of certain international funds. It is therefore, conclusive that currency hedging is an important aspect to engage in and as the top management at headquarters of an institution, it is proper to engage in them.
Works Cited
Lucchetti, Aaron, Currency Hedging Draws Both Advocates, Opponents. Staff Reporter of the Wall Street Journal
Lucchetti, Aaron, Fund Managers Disagree on Value of Currency Hedging