How can a business best strike a balance between risk and return when hedging in foreign currencies?
Probably the term with more weight is risk. Your company is probably not in the game of foreign exchange speculating. It is most likely buying or producing a product for sale or providing a service for sale. Therefore, it should concentrate on what it does best. Most companies would be better served by eliminating as much foreign currency risk as possible. However, some business situations cannot completely eliminate risk. In this situation you can try to set a downside floor with the use of such vehicles as options. Setting a floor with an option or leaving an order to buy or sell on a stop-loss basis can also leave potential upside returns on a hedging strategy. GARY LOE is vice president at Comerica Bank. Reach him at (800) 318-9062 or firstname.lastname@example.org.