Some people argue that, given the complexity and unpredictability, currency hedg

Question

Some people argue that, given the complexity and unpredictability, currency hedging is not worth the risk. Do you believe currency hedging is worth the risk for Markel Corporation why or why not. Compare the firm’s profits and losses from currency hedging. Assess whether Markel Corporation can improve the performance of its currency hedging and increase its profits from it.why or why not.
Besides currency hedging, identify two other currency management strategies can Markel Corporation choose to fight currency fluctuations, since it exports 40% of sales. Explain your choices.

Explanation / Answer

Currency Hedging:

A transaction implemented by a forex trader to protect an existing or anticipated position from an unwanted move in exchange rates. By using a forex hedge properly, a trader who is long a foreign currency pair can be protected from downside risk, while the trader who is short a foreign currency pair can protect against upside risk.

Other currency management Techniques:

There are a wide variety of active currency management strategies that are used in the market, varying at one end of the spectrum from entirely discretionary-based trading to strict rule-based strategies. Three prominent strategies that we will look at in this series of posts are closer to the latter rather than the former end of this spectrum:
Differential forward strategy
Simple trend-following strategy
Optimization of the carry trade
All three of these strategies have consistently added alpha to a portfolio if followed rigorously and interestingly have also proven to be risk reducing compared to unhedged benchmarks.

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