Mitigating Financial Risks through Hedging

Companies use hedging tools for various reasons. One of these reasons is to control and reduce financial exposures that companies face. Although companies may not do away with all the financial risks they are exposed to, they can use effective and sound financial tools to reduce and deal with the various financial risks to a minimum level. Given the situation of the financial institutions, the risks faced by these institutions tend to be multidimensional, with the main financial risks being the market risks, credit liquidity, and interest rates. Some risks associated with liquidity and interest rates occur because the variations exhibited in the earning are likely to be caused by the cost of funds and the variations of the interest rates. As such, the earnings of the financial institutions tend to be very sensitive to the cost of funds and the moves in the interest.

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