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:
“When human beings have been fascinated by the contemplation of their own hearts, the more intricate biological pattern of the female has become a model for the artist, the mystic, and the saint. When mankind turns instead to what can be done, altered, built, invented, in the outer world, all natural properties of men, animals, or metals become handicaps to be altered rather than clues to be followed.”
—Margaret Mead (1901–1978)
“Our sea-walled garden, the whole land,
Is full of weeds, her fairest flowers choked up,
Her fruit-trees all unpruned, her hedges ruined,
Her knots disordered, and her wholesome herbs
Swarming with caterpillars.”
—William Shakespeare (1564–1616)