If hedging currency risk is to add value to the stakeholders of the firm, then hedging must impact either expected future cash flows or the cost of capital or both.

Question

Quizplus · Accepted Answer

Hedging currency risk can affect the expected future cash flows of a firm by reducing the uncertainty surrounding these cash flows, which can lead to a more accurate estimation of future earnings and potential growth opportunities. Hedging can also impact the cost of capital by reducing the risk premium associated with foreign currency exposure, which can make a firm more attractive to investors and potentially lower the cost of debt and equity financing. Ultimately, hedging can add value to the stakeholders of a firm by reducing the risk of currency fluctuations and increasing the predictability of future cash flows.

If Hedging Currency Risk Is to Add Value to the Stakeholders