With appropriate reference to theoretical and empirical literature, Essay

With appropriate reference to theoretical and empirical literature, critically assess the arguments of why a multinational may undertake corporate hedging - Essay Example Hence, it is the policies based on increased exposure of firm to price instability, resulting from future price knowledge. Corporate Hedging is done by multinational companies a lot, and the trend is being picked up speedily Motivation factors of multinational firms for corporate hedging seem are facilitation of internal contracting, competitive pricing concerns, and informational asymmetries. Moreover corporate hedging depends upon accounting treatment, derivative market liquidity, recent hedging outcomes, foreign exchange volatility, technical factors, and exposure volatility. What we need to understand is the reason for the multinational firms to take up corporate hedging. There are opportunities like increased leverage and tax benefits that are the motivating factors behind corporate hedging. The multinational companies opt for the hedging process simply because of the risk factor. More correctly it does not take away the risk rather the unacceptable risks are converted into acceptable risks. Many companies remain confused towards making the decision whether they should hedge or not hedge. The factors that hinder their decision making is the doubt about the risks, the cost of the hedging process itself, fear of reporting loss on derivative transactions. Also adding to all this confusion is the lack of strategies and also the un- familiarization with hedging tools. Then is the role of the corporate risk managers. They must determine the risks the company is willing to take and also the ones that the company wants to get away with through hedging. The fundamental principle behind corporate hedging is its hindrance against losses that multinational companies may face in difficult situations. Like for example the losses that incurred many IT companies by the year 1997 when there was depreciation of dollar. More commonly we can explain hedging functions in a similar manner as the hedges that protect the garden from stray dogs. The goal behind any hedging