Engage the Class in a Discussion of Why Firms Hedge

Essay

Engage the class in a discussion of why firms hedge risks.Steer them towards an understanding that firms manufacture products,they do not speculate in commodity markets.Now,turn the tables and ask why manufacturers do not employ pure hedge strategies with forward contracts.Try to get the class to arrive at the conclusion that since firms are experts in their respective industries,their knowledge may benefit them by implementing creative strategies,while still hedging losses.