Evaluation of Hedging Techniques as Instruments to Minimise the Impact of Transaction and Translation Risks in Global Business Market

The current global economic development has made it possible for corporate executives to operate anywhere they wish over the world. This opportunity, however, depends on the need and strategy of the company concern. Some companies go into the global market in order to exploit an opportunity that has been identified. Others go global as a market expansion strategy. Others may be due to the fact that the company has reached the maturity stage in its local market, they would have no choice than to go global in order to be in business.Companies have many choices by which they can go into the global market. They may choose importing and exporting, licensing and franchising and by direct foreign investments (DFI), such as joint ventures, minority and/or majority interest and Greenfield operations.Whichever forms the foreign operations take, the local company would be exposed to foreign currency exchange risks. To reduce these risks, the company can make use of natural hedging or using other technical hedging instruments. By natural hedging, the company can choose to bill their foreign customers in the home currency. On the other hand, the multinational company can make use of hedging techniques (derivatives) like spot, forward, futures and options markets. With this strategy, the company can purchase the exchange rate futures or options to purchase some currencies at a future date with the rate set now.Another form of risks faced by the local company in the foreign markets is the country and political risks. The company, however, has the opportunity to design good strategies for handling such risks. Alternatively, the company can take some insurance against some political risks.Though these strategies can help multinational companies to reduce the currency and other risks associated with the foreign operations, they are not complete without obstacles. Trading volume is concentrated in the spot and the forward market than the futures and options and the London International Financial Futures Exchange (LIFFE) and International Monetary Market forms the biggest markets, with the highest volume in the world. Also the volatility of the currency prices in the market as a result of the release of macroeconomic information from the various countries involved in the market.In spite of the drawbacks of the FX market, it remains the best and effective means by which the multinational companies can minimise the FX risks of their international operations.