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Developing an effective corporate hedging policy
A well-designed hedging plan allows management to focus on aspects of the firm in which it has a competitive edge by minimising risks that are not central to the core business.
To extend last week’s article on hedging, today, I highlight why certain non-financial firms (read: commodity exporters, importers) need to develop a corporate hedging policy. As more and more companies suffer the consequences of being unhedged, having such a policy is becoming vital. I highlight the three pillars in building one.
The first pillar is a clear articulation of the firm’s hedging objectives. These should be directly tied to the company’s broader financial goals such as stabilising cash flows, hedging against short-term commodity price increases, managing foreign exchange risks or “locking-in” profit margins.
