Developing an appropriate risk management strategy represents one of the core task s for an organization, especially when expanding into the environment of a new market. While predicting all possible risks that may occur in a sociocultural and economic setting is virtually impossible, a company can and should evaluate the selected environment and isolate the factors that can be regarded as potentially threatening to its performance. When considering the problems of financial risk exposure in the context of a different country, translation exposure risks are typically seen as the most prominent ones.
The strategies for avoiding translation exposure risks are quite numerous. Among the core approaches, one must mention hedging as the framework to which most organizations typically choose to resort. By definition, hedging is a strategy of reducing the financial losses typically taken due to adverse price fluctuations (Tiwary, 2019). As a rule, hedging implies assuming the opposite position when performing transactions in relation to a particular asset (Tiwary, 2019). Remarkably, the sue of hedging does not mitigate the risks associated with losing financial resources due to the inconsistencies in currency rates but, instead, allows compensating for the lost assets (Tiwary, 2019). Therefore, one could see hedging as the approach that allows an organization to survive even if the risks have not been avoided.
Though hedging is an admittedly effective approach, it is not devoid of problems. For example, while minimizing the damage produced as a result of the transitioning to another market, it also leads to a significant drop in profits (Tiwary, 2019). Therefore, when using hedging, a company must be in complete control of its financial resources and in possession of a perfect tool for market analysis and financial forecasts. Thus, a company will be able to avoid risks associated with the translation of its financial assets into the context of a different economic setting.
Reference
Tiwary, A. R. (2019). Study of currency risk and the hedging strategies. Journal of Advanced Studies in Finance (JASF), 10(19), 45-55.