What are the advantages and disadvantages of financial hedging of the firm's operating exposure vis-a-vis operational hedges (such as relocating manufacturing site)?
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Question:
What are the advantages and disadvantages of financial hedging of the firm's operating exposure vis-a-vis operational hedges (such as relocating manufacturing site)?
Hedging:
Hedging refers to a strategy which is considered by an investor in order to protect their investment from the financial risk. In other words, hedging is a position which is preferred by the investor to minimize risk in their investment.
Answer and Explanation:
Advantage:
The main advantage of financial hedging is that it can be implemented easily in short-term investments. It can be easily applied to reduce the risks which can be generated from the operating activities of the company. In the case of operating exposure, it also involves low cost for its implementation.
Disadvantage:
Operational hedge requires more time, and due to the huge time taken by the operational hedge, the cost of hedging all start rising. Along with that if any changes will be required in an operational hedge, then it won't be easy to reverse the hedging strategy.
