Why is the company better off by not hedging market and currency risk? If the market risk is hedged they will be better off when oil prices fall as they will be protected by the hedge and also the home currency will depreciate which is good for them. It also says they need not hedge currency risk. Why? I don’t seem to understand this situation. Can someone explain this particular problem to me. I couldn’t make out a thing from this作者: Darien 时间: 2013-4-20 05:36
The question tells you do 2 hedging together: market hedge + currency hedge
It is not necessary because when oil price go down, sale in foreign currency down but domestic currency depreciate let sale in local currency increase.作者: neil1234 时间: 2013-4-20 05:38
If hedged - taking position in futures (short)
If Oil price increases—-Company Sales income increases—future posiiton loss ( futures prices also increases& we are short here) —-but home currency appreciates in $ terms (due to +ve correlation with oil)– lowering demand from US - Double whampy effect
If Oil price decreases—-Company Sales income decreases—–future posiiton profits–but home currency depreciates (due to +ve correlation ) increasing demand from US - Company is better off
But remains exposed to currency risk
