Hedging Net Investment

Hedging Net Investment

Part 1

As described in the text, gains and losses on foreign currency borrowings can be used to hedge the net investment in a foreign subsidiary. How are these reported in the consolidated financial statements? In addition, what other techniques may a company use to hedge net investments? Develop a 200-to-300-word analysis supporting your position.

Part 2

If you work for a publicly traded company, download the company’s annual report. If you do not work for a publicly traded company, download the annual report of one of your favorite brands (e.g., Apple or Dell). Search through the report and look for the section regarding “managing risk” (it may be under a different name, but it is in there). Describe how this company uses hedges or contracts to manage currency risk.

Answer preview

Business has its inherent risks, and this reality causes companies to take various measures to reduce the risks posed by the business environment’s unpredictability. One of the most common steps that businesses take is net hedging, and this is an instrument designed to limit a business corporation’s vulnerability to volatile market situations (Butnariu et al., 2018). This aspect is even more critical to firms whose business entails handling foreign currency. The global economy is so unstable that a single event could trigger the deterioration of a given currency’s value. The first step is to understand the manner of reporting these changes in a consolidated financial statement. Businesses use a balance sheet to weigh their liabilities against their assets, thus facilitating equity determination. This approach incorporates realized gains or losses as well as unrealized ones.