Explanation:
Reducing earnings variability (e.g., smoothing earnings) is one of the reasons often cited as a hedging advantage. Implementation costs outweighing benefits is a disadvantage, as are increased complexities and differential cash flow timings.
(Book 1, Module 2.1, LO 2.c)
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Question 91
A derivatives trader recently joined Risk Management Associates (RMA) as an expert in implementing hedging strategies for complex corporate matters. After discussing a couple of alternative implementation ideas with a client that has multiple geographic and segment exposures, the trader made notes regarding the advantages of implementing a hedging program. Which of the following statements supports the concept that hedging has the most potential advantages for the firm?
A
The implementation costs outweigh the potential hedging benefits.
B
The hedging program is forecast to reduce earnings variability over the next five years.
C
The complexity of the firm requires a complex, difficult-to-implement hedging strategy.
D
The timing of firm operational cash flows appears substantially different from that potentially required for the hedging strategy.
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