Natural Hedges
Many hedges do not involve exotic financial instruments or derivatives such as the married put. A natural hedge is an investment that reduces the undesired risk by matching cash flows (i.e. revenues and expenses). For example, an exporter to the United States faces a risk of changes in the value of the U.S. dollar and chooses to open a production facility in that market to match its expected sales revenue to its cost structure.
Another example is a company that opens a subsidiary in another country and borrows in the foreign currency to finance its operations, even though the foreign interest rate may be more expensive than in its home country: by matching the debt payments to expected revenues in the foreign currency, the parent company has reduced its foreign currency exposure. Similarly, an oil producer may expect to receive its revenues in U.S. dollars, but faces costs in a different currency; it would be applying a natural hedge if it agreed to, for example, pay bonuses to employees in U.S. dollars.
One common means of hedging against risk is the purchase of insurance to protect against financial loss due to accidental property damage or loss, personal injury, or loss of life.
Read more about this topic: Hedge (finance)
Famous quotes containing the words natural and/or hedges:
“Surely knowledge of the natural world, knowledge of the human condition, knowledge of the nature and dynamics of society, knowledge of the past so that one may use it in experiencing the present and aspiring to the future—all of these, it would seem reasonable to suppose, are essential to an educated man. To these must be added another—knowledge of the products of our artistic heritage that mark the history of our esthetic wonder and delight.”
—Jerome S. Bruner (20th century)
“Here tulips bloom as they are told;
Unkempt about those hedges blows
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—Rupert Brooke (1887–1915)