Numerous products are available, including currency or exchange rate swaps, forward contracts, futures and options. Another option, which covers some of the translation risk as well, is to index costs and revenues to the exchange rate. Translation risk is more difficult to address, but there are methods. DWI can build an operational hedge, whereby inflows from a particular country are matched by outflows. Other tactics, such as using an average exchange rate for the entire income statement or balance sheet, can mitigate the risk but not eliminate it.
Economic risk is a significant form of risk because many of DWI's industries are cyclical. This risk is less critical for DWI because the company is well-diversified across many industries and countries. This is an operational hedge against the impacts of a faltering economy against any one of our businesses. However, some economic risk still remains. It can be hedged by establishing a link between interest rates and company earnings, using this to set up an ideal capital structure. What this means is that if DWI understands how its businesses react...
DWI has significant exposure to many forms of risk. By using some of the basic hedging strategies outlined above, we can reduce risk not only in each business but firm-wide as well.
Works Cited
Moore, Howard L. (1999). "Hedging Political Risk" Global Finance. Retrieved November 21, 2008 at http://findarticles.com/p/articles/mi_qa3715/is_199909/ai_n8870125
Francis, Rob. (2002). "Growing Natural Hedges" Frontier Economics. Retrieved November 21, 2008 at http://www.frontier-economics.com/_library/publications/frontier%20bulletin%20-%20growing%20natural%20hedges.pdf
Gray, Philip & Irwin, Timothy. (2003) "Exchange Rate Risk" World Bank. Retrieved November 21, 2008 at http://rru.worldbank.org/Documents/PublicPolicyJournal/266Gray-121203.pdf
