Some Issues in Corporate Hedging Policy

The increased volatility of financial markets in recent years has led to a corresponding increase in the volatility of corporate earnings. This has, in turn, led to a surge of interest in hedging. At first sight, it may seem that, to the extent it can reduce volatility, hedging is a worthwhile activity. However, we argue that the issue is less clear-cut than meets the eye. In the process of developing our arguments, we shall look at some of the financial instruments available for hedging and shall show how they can be used for various hedging and non-hedging purposes.