Understanding international finance. Should a firm hedge? Why or why not? Many US firms do not hedge. How would you explain this result?

A) Should a firm hedge? Why or why not?

b) Recent surveys of corporate exchange risk management practices indicate that many US firms do not hedge. How would you explain this result?

c) GM exports cars to Spain, but the historically strong dollar against the Euro hurt sales of GM cars in Spain. In the Spanish market, GM faces competition from the German, Italian and French car makers. What kind of measures would you recommend so that GM can maintain its market share in Spain?

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...is to make the outcome more certain. It does not necessarily improve the outcome. However hedging reduces a risk that a firm faces. Therefore a firm which faces a risk should hedge. This is because a firm in manufacturing for example, that sources its components from abroad will find its competitiveness eroded if it does not cover its risks. A manager is paid to take risks but not paid to take many risks. He should take risks that he understands. For example, in predicting the number of customers etc but when it comes to taking a bet on exchange rate fluctuations which he is not trained to handle, he should reduce the risk by hedging.

b) Recent surveys of corporate exchange risk management practices indicate that many US firms do not hedge. How would you explain this result?

This may be because these firms ...