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Hedging Cash Balance Uncertainties

Hedging Cash Balance Uncertainties

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Published by Aditya

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Published by: Aditya on Jun 27, 2010
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06/12/2011

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Hedging Cash BalanceUncertainties
 At the end of cash period of cash forecast, thefirm expects to be in either a surplus or a deficitposition. Let us examine risks and cost that thefirm would face if it did not hedge in cash of these cases.That is assume that the firm keepsno cash, near-cash marketable securities ,additional borrowing arrangements or anyother possible hedge.
 
Cont««««««.
If the firm is in a period of borrowing at itsmaximum available borrowing limits and cashflow turn out to be less than expected the firmwould be face with a substantial problems. Allthe solutions to this problems are costly.For eg: the firm could raise cash to cover thedeficit by obtaining an emergency loan from itsbank.however banker are not very receptive toemergency request of this type and this solutioncould emergency the firm relationship with itsbank.
 
HEDGING METHODS
Holding a stock of extra cash: A stock of cash kept by the firm beyond thatneeded for transactions. Cash is the mostflexible but the most costly hedge available tothe firm. It is most flexible in that it can hedge ashortage in any circumstances at any time withno transaction costs. If the firm holds a stock of extra cash as a hedge and expected a shortageduring a period of borrowing or a period of lending. It can cover the deficit simply bydrawing funds from its cash account.

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