Submitted By: Muhammad Hassan

Reg. No.: L1F21ASOC0034

Submitted to: Sir Fahad

Course: Financial management

Date: FEB 8th 2023

 HEDGING Approach

Hedging approach is a risk management strategy used by organizations to mitigate

the impact of financial and other risks. The approach involves using financial
instruments, such as forwards, futures, options, and swaps, to hedge against
fluctuations in currency exchange rates, commodity prices, interest rates, and other
variables that can affect the organization's financial performance.

The purpose of a hedging approach is to reduce the uncertainty and volatility

associated with financial risks and to provide a more stable and predictable
financial future for the organization. The specific instruments used and the extent
of hedging activities will depend on the organization's risk tolerance and the types
of risks it is facing.

A hedging approach can help an organization protect its financial performance

against market fluctuations, increase the predictability of its financial results, and
enhance its ability to make informed investment and financing decisions. However,
it is important to implement a well-structured and effective hedging approach to
ensure that it achieves its intended objectives and does not create new risks.

The hedging approach involves the use of financial instruments to hedge against
the risks. Some of the common financial instruments used in hedging include:
1. Forwards: A forward contract is an agreement to buy or sell an underlying
asset, such as a currency, at a specified price on a future date. Forwards are
commonly used to hedge against currency exchange rate risk.
2. Futures: A futures contract is an agreement to buy or sell an underlying asset
at a specified price on a future date. Futures are often used to hedge against
commodity price risk.
3. Options: An option gives the holder the right, but not the obligation, to buy
or sell an underlying asset at a specified price on or before a specified date.
 Options can be used to hedge against a variety of financial risks, including
currency exchange rate risk and commodity price risk.
4. Swaps: A swap is an agreement between two parties to exchange one set of
cash flows for another. Interest rate swaps are commonly used to hedge
against interest rate risk.
The specific instruments used and the extent of hedging activities will depend on
the organization's risk tolerance and the types of risks it is facing. For example, an
organization with a low risk tolerance may choose to hedge a greater proportion of
its risks, while an organization with a high risk tolerance may choose to hedge only
a small portion of its risks.
It is important for an organization to have a well-structured and effective hedging
approach to ensure that it achieves its intended objectives and does not create new
risks. This includes regularly monitoring the effectiveness of hedging activities and
making changes to the hedging strategy as needed.
In summary, the hedging approach is a risk management strategy used by
organizations to reduce the impact of financial and other risks and provide a more
stable and predictable financial future. The approach involves using financial
instruments, such as forwards, futures, options, and swaps, to hedge against
fluctuations in financial variables.