MGT339H5 Lecture Notes - Lecture 2: Barrick Gold, Starbucks, Foreign Exchange Risk
Document Summary
Derivative - contracts that have value where payoff derives from market variables. Equity prices (i. e. mutual fund faces stock price changes) Companies can use these contracts to transfer risk (in those 4 areas) Starbucks is in the coffee industry and they focus on transferring risk therefore they are hedging. Costs from around the world deal with accounts payable (i. e. supplier in the states. When canadian dollar gets stronger against usd, costs are cheaper) To hedge you must identify unhedged position and determine the offset. Hedging has small costs but effectively there is no cost relative to the whole transaction. This can be done naturally or using financial instruments. Natural hedge - exists when operational choices are made which reduce exposure to uncertainty. Barrick gold corp. can buy an oil company to natural hedge by affecting the input price of the oil. Financial hedge - exists when a financial contract is created which will generate the desired payout.
