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FRM-1 Study Notes

Is hedging always good?

  • Hedging and shareholders: Shareholders can hedge the risk themselves. Companies don’t need
    to. But do the shareholders have as much information as the companies? What about transaction costs and commissions? Companies carry out high volume transactions hence cost of hedge
    is lower
  • Hedging and competitors: What if the price of hen food was reduced as the hen producers union pressed the suppliers to reduce their prices. HP ‘s profits would rise as he had locked his selling price and the raw material prices went down. For others the change in profits would be 0. What if the raw material prices went up for some reason and the union decided to raise their selling prices in the market proportionately. HP’s profit would reduce while others profit remain the same. Hedging actual is causing fluctuation in profits!!
  • Any other reasons you can think of?

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