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Impact of Hedging on Profitability

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Using any illustrative data, show the effect of hedged versus non-hedged exchange rate changes on a company's profitability. Please provide a step by step discussion and clear illustration.

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Solution Summary

This example provides how hedging will increase the mean, but reduce the distribution of your profits.

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Hedged vs Non-hedged exchange rate changes can have a substantial impact on the company's profitability.
For example, consider GM. Suppose they have taken a loan of 20 million pounds from a London based bank. GM does have a presence in UK, but UK is not a major market for GM, and therefore it is safe to assume that GM gets most of its revenue from other countries. For the sake of argument say that they get most revenue from the U.S. Assume that the day they took the ...

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