Which hedging strategy should apple use? Business & Marketing Essay

Which Hedging Strategy Should Apple Use?
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Hedging is a risk management strategy that a company experiencing or predicting losses can utilize to minimize the impact of the risks. One of the major risks that affect businesses is exchange rates that are caused by fluctuation of currency in the country of investment compared to foreign currency. It is an always-present risk that cannot be eliminated but some methods can be used to mitigate the situation. Hedging is one of the methods that have proven to be effective in reducing a company’s losses as a result of economic risks. Referencing Apple’s $1.6 billion loss due to currency fluctuation, here are hedging mechanisms it should have used to protect itself.
One way to combat the risk of fluctuating currencies is the use of currency futures. This hedging technique involves an exchange-traded futures contract where the involved parties can be kept in the loop of future currency exchanges.CITATION Cur19 \l 1033 (CHEN, Currency Futures, 2019) The contracts even go as far as specifying the price in which one currency will be sold or bought soon. The holders of the contracts are legally bound to trade at that price at the specific date regardless but it also allows them to change their business approach in preparation for future losses. For apple, this tactic would have been efficient in helping them minimize the losses they incurred.
Apple's major markets are Russia, Brazil, Japan (EWJ), China (FXI), Canada, Southeast Asia, Australia, the Eurozone, and Turkey. CITATION Ada16 \l 1033 (Rogers, 2016) For a company of its size, it is heavily faced with the risks of currency fluctuations which they have no control of. The fluctuations are caused by currency weakening against the US dollar and slow economic growth in these countries. With currency futures, it can project the potential fluctuations in these countries by selling a certain amount of currency. For instance, Apple could have sold 1000 future contracts of Russian Ruble to hedge its projected receipt. Therefore, if the Russian Ruble depreciates against the Us dollar, their money is protected. The downside to this technique is if a company gets into such a contract, they will have to pay the exact price for the Russian Ruble agreed on. This means foregoing any potential profit if the fluctuations happen in Russian Rules favor.
Another technique Apple should have used is a money market hedge. This technique involves locking the value of a currency for an agreed future transaction in advance. CITATION JAM20 \l 1033 (CHEN, 2020) The money market is unpredictable at times and this technique ensures that any agreed tr...