Read the document and table and only write the recommendations Essay Example
I recommend hedging option because the option has various benefits and the upside benefits can be exploited while having fixed costs in all situations when compared to the other options. Some of the benefits of hedging include that hedging will limit the loss for the company and also protect the profits of the company. In addition, hedging option will assist in increasing the liquidity within market financials, for instance stock market. This is because of hedging, individuals trade within different markets to decrease the loss and this results to ample liquidity within various markets and this results to improved price discovery of asset.
Unstable outcomes and benefits usually vary compared to forward ( stable impacts)
Costs to facilitate the complex financial instrument are high because the expertise needed to control and manage these options
It depends on how necessary and important this financial process to the wellbeing of the company; otherwise the company should focus on its main operating activities rather than exploiting benefits from financial assets. Therefore, the company can use forwards because this is not costly to the company and not too complex to manage.
Hedge is important to AIFS because of the associated benefits and hence hedging option is good because option hedge provide significant benefits to AIFS
Volume-up and volume-down Scenarios
This phase focuses on the fluctuating sales and its impact in regard to the three hedging strategies that can be employed. According to figure 2, the 100% forward hedge strategy does not have any impact on the given scenarios. On the other hand, 100% option hedge keeps on fluctuating depending on the volumes. The completely unhedged strategy is the most erratic strategy and had the most significant impact on volume fluctuation.
While 100% forward is the most recommended strategy due to its stability, 100% option can also be considered because it can projected easily and is dependent on the volume changes.
AIFS hedging recommendations
From the analysis, both hedging option and 100% forward are the most beneficial to AIFS. This is because both analysis from part C and B indicate that hedging option has many benefits such as reducing the overall costs, when compared to other alternatives. On the other hand, 100% forward is a very stable option and hence recommended. From the current company conditions and its financial state, AIFS should both hedging option and forward hedge. This is because while hedging option has the most significant benefits, forward hedge has some cost advantages due to the stability of the strategy.
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