Foreign exchange risk and the corporate treasurer: what makes a good hedge?

The first step in managing risk is to work out the specific risks you want to address.

This is usually a three-step process:

1. Determining what kinds of risk the organisation faces

2. Quantifying the financial size of the risks and their potential impact

3. Selecting which risks need to be mitigated, and whether full or partial mitigation is needed

Having completed this exercise, the treasurer must then select the appropriate instruments. In this paper, we’ll use the example of foreign exchange risk to examine the entire risk lifecycle and the relevant choices and considerations.

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