Currency Hedging

After reading the case about Aspen Technology I decided to research and try to learn a bit more about currency hedging and some ways that companies that might engage in this strategy.

A simple way to describe currency hedging is that it is a strategy used by companies when engaging is some sort of foreign investment. Basically, the process compensates for any possible shifts in the relative value of the currency types used within the investment. This way, even if there are unfavorable shifts in the money market, a positive return on the investment will still likely be achieved.

Using currency hedging seems to be a great way to keep the amount of loss at a minimum when dealing with international investments. However, the strategy is quite useful because it doesn't diminish the ability of a firm to make large profits. By using currency hedging, the firm might even be able to become involved in great investment opportunities that otherwise would have been considered far too volatile and risky.

Currency Hedging Definition

I was interested in what other companies may engage in some sort of foreign exchange risk management and found an article about GM. GM seems similar to Aspen Technology in some ways as far as how they manage this risk. Like Aspen Technologies, GM does a lot of buying, selling, and financing in currencies other than the US Dollar. Therefore, they too face risk from the volatility of other currencies. In particular, GM has to deal a lot with financing, since most cars are purchased with some sort of financing contract, much like the ones in place for Aspen's software.

I also thought it was interesting, because I remember reading in the case that Aspen Technology has difficulties finding any counterparts willing to enter into long-dated forward contracts. Therefore, they typically only entered into one or two year forward contracts to protect them from the foreign exchange rate risks. GM is very similar to this, in the article it states that for transactions denominated in foreign currencies, GM typically hedges forecasted and firm commitment exposures up to three years in the future.

It seems that foreign exchange risk is hedged out a great deal among companies. Even some large companies, many people are familiar with, such as GM. Overall, I think it was just very interesting to see all the parallels between the risk management policy of Aspen Technology and that of GM in regard to this foreign exchange risk.

GM Foreign Exchange Risks