One of the primary practical uses of derivatives in the market is the use by multinational corporate to hedge against risk based on operations, investments, and financing activities. For corporations to engage in financial hedging, a number of items must be in place in terms of the development of a policy, the strategy development and finally, developing a process that will be used on an ongoing basis to implement hedging and monitor progress.
You have just been hired as the Treasurer of a major multinational manufacturing company with operations and sales in over 10 countries. The nature of the business has resulted in revenues generated in a number of currencies, supplies purchased globally in many currencies, and a capital structure which includes financing attained (via bonds and bank loans) in a number of different countries across the globe. The primary reason that you were hired is that the incumbent Treasurer did not put a risk management process in place which has resulted in some rather large income statement hits over the past few years.
Your goal as the new Treasurer is to implement this new policy and initiate the hedging process. To do so, you will need to address the following items:
1. Why does a company require a formal risk management policy?
2. What factors should be considered in the development of this policy?
3. How do we translate the policy into an effecting global strategy?
4. Regarding the corporation, based on their profile, what types of risks are likely in place?
5. Which derivatives should we consider as part of our hedging approach? Which should be excluded and why?
6. Which tools can we use to assess our risk profile as a company?
Your total project should be 6-10 pages long. Ensure you have a title and reference page and eight references (at least 6 are scholarly/peer-reviewed). Also, be sure to include a comprehensive introduction and conclusion for the paper.
