FINAL EXAM Essay Example | Topics and Well Written Essays - 2500 words

FINAL EXAM - Essay Example They are less important for managing or hedging against short-term exposures because demand uncertainty is always lower in the short term. In addition, operational hedging is likewise less crucial for commodity-based firms that face price rather than quantity uncertainty. Financial instruments are greatly used by forms to hedge against short-term exposures while operational hedges are used greatly to hedge against long term exposures. The foreign currency cash flows of firms that have plants both in foreign and domestic location are not independent of the exchange rate. And therefore, optimal financial hedging policy should entail forward contracts as well as foreign currency put and call options. Natural hedges helped MNCs to offset unexpected fluctuations in foreign currency exchange rates especially operational hedges that are associated with geographical diversification. Operational hedging often compliments financial hedging. For instance, MNCs use financial derivatives to mitigate risks exposures while they are operationally hedged, geographically diversified. Financial instruments are used to reduce the basic component of profit variability while geographical diversifications (operational hedges) can reduce firm-specific risk exposures. The use of both financial derivatives and operational hedges improves firm value. Operational hedges are not perfect substitutes for financial risk management. In the case of CARREFOUR S.A., Carrefour used financial market instruments, Forward contract, to hedge against their foreign currency borrowings in order to maintain total debt requirements at 97% in Euros. MNCs often use both parallel loans and currency swaps to achieve a similar objective. For instance, they provide a cheaper form of debt because they easily borrow in their respective countries and then swapping the debt. Both parallel loans and currency swaps helps the MNCs in