Financial Hedging and Its Instruments Research Paper

Financial Hedging and Its Instruments - Research Paper Example This report evaluates the financial instruments in light of the risk management system of three different companies. A personal view has been given after the analysis part. However, there have been certain constraints while conducting the analysis, as companies do not prefer to reveal much about their positions in hedging instruments. The financial crisis of the 1990s created enormous disruption and imposed huge costs of lost output in a number of emerging market economies. The crisis was particularly painful as local organisations had to face large exchange rate or interest rate risk with insufficient hedging possibilities. At this time, as the market was quite illiquid, even the massive undervaluation of assets was unable to attract foreign investors. This was the consequence of the companies’ inability to hedge certain types of market risks. As a consequence, the prospective benefits of global financial market integration were not fully exploited. However, over the past few years, the markets for hedging have expanded in size and scope. The establishment of bond and spot foreign exchange markets and derivative products has helped to enhance the hedging processes. The ever-growing significance of the hedging instruments has been established by the fact that trading activities in the futures market on cash instruments have been larger than the conducts in the underlying cash market. These days a number of instruments have been used to hedge the assets and commodity price risks. However, the fundamental structures of these instruments are kept almost same across all financial markets (Mathieson, â€Å"Development of Market Based Hedging Instruments†). Many organisations buy insurance against a wide range of hazards on their assets. By purchasing insurance, the companies pass on the risk to the insurance company; this is done for a certain amount of insurance premium. However, the risks, covered by these kinds of financial instruments, have less probability of occurrence as compared to other financial risks.  Ã‚