Respond to at least two of your classmates by commenting on their posts with constructive comments that move the conversation forward. Minimum of 100 to 200 wordsWeekTwoResponse

Tricia’s Post

• Why do some companies like Apple hedge foreign currency sometimes and not at other times and companies like Walmart decide not to hedge currency at all?

In hindsight, the main reason why a company would participate in hedging foreign exchange is to protect investments or minimize risks to their profits from political, “regulatory, and cultural risks of various countries” (Peng, 2023, p. 240). That said, reasons to hedge and strategies are wide and vary depending on the company and industry. Therefore, one reason could be pressure from board members of shareholders that may prompt CEOs/CFOs to participate in hedging FX (GTreasury, n.d.). Also, in anticipating FX fluctuations, some companies may decide to hedge as assurance around the value of the USD, which will impact how they report foreign revenues and/or expenses.

In Apple’s case, which generates a large portion of its revenues from its international businesses, hedging is a way to protect its foreign investments against the USD or currency volatility. For example, a stronger USD creates financial challenges for Apple in foreign countries by way of higher operating costs.

On the other hand, according to Peng (2023), most large corporations in the U.S. view foreign currency hedging as a costly transaction; hence why these firms don’t even bother as they “believe that the ups and downs of various currencies even out in the long run” (p.239).

• Ray Dalio is a hedge fund manager. Based on his TED talk, how do you think he would advise you to prepare foreign exchange strategies and why?

To be honest, Ray would advise approaching the foreign exchange with a range of opinions or different perspectives before deciding. In addition, he would also advise being transparent and radically truthful with everyone. This will foster an environment of collective decision-making. Conversely, one key point that stuck out for me was making a lot of mistakes that he later viewed as lessons and principles that eventually helped him in the future. He also mentioned, “bet against the consensus and be right”. I interpret this phrase as ‘if you’re going to make a claim against the majority, you better have evidence or the data to prove that your claim is right’. At the same time, don’t be arrogant and naïve, but instead, be open-minded to different perspectives.

Dalio, R. (2017, April). Ray Dalio at TED2017: How to build a company where the best ideas winLinks to an external site. [Video]. YouTube. https://www.ted.com/talks/ray_dalio_how_to_build_a_company_where_the_best_ideas_ win

GTreasury. (n.d.). 10 Reasons Why Companies Hedge Foreign Currency Risk. https://gtreasury.com/blog/10-reasons-why-companies-hedge-foreign-currency- risk/Links to an external site.

Peng, M. W. (2023). Global business (5th ed.). Cengage Learning.

Shannon’s post

Companies that choose to hedge their money must have the money up front to do so. One of the determining factors is the industry of the business and their liquidity to apply towards investment activities. Grocery stores tend to have high turnover of inventory, and low profit margins to keep cash on hard for investments. They tend to have a high amount of inventory on hand and make a profit off the quantity of sales. A technology firm will work almost the opposite of Walmart, in that they depend on investments and debts to fund new innovations while keeping low inventory on hand available to sell quickly. In a way, technology firms thrive on risk, where stores like Walmart are steadier and more stable. Also, one industry supplies consumers with necessities, where another does not.

Tech companies like Apple are going to involve managers from production, marketing, sourcing, and finance to determine the best timing and currencies to hedge (Peng, 2023). “Currency hedging requires firms to have expectations or future spot rates relative to forward rates" (2023, p.235, para.5). This is not only potentially financially costly, but human resource costly, and making the right move can result in favorable or unfavorable outcomes depending on how well their bets were cast. Obviously, the goal of hedging would be a result of high profits, which is why companies like Apple would not hedge foreign currency at times based on their forecasted projections of foreign currency rates and how well their investments would pan out.

After watching Ray Dalio’s Ted talk, the biggest piece of advice I imagine him giving is to ask around, get different opinions and perspectives before making decisions and taking risks. This “radical transparency” of having real conversations allowing room for difference of opinion can provide humans with a better opportunity to make decisions “algorithmically” (Dalio, 2017). “In the world of risk, probabilities, alternatives, and consequences can be readily calculated, weighed, and considered; and we must wrestle our intuitive impulses into submission for rational optimization” (Burton, 2018, para. 1). This type of collaboration allows the best idea to win, while overriding out intuitive impulses.

References:

Burton, J. (2018, October 22). Algorithms for simpler decision-making (2/2). The Decision Lab. Retrieved March 23, 2023, from https://thedecisionlab.com/insights/society/augmented-decision-making-big- data?utm_campaign=TDL%2BDynamic&utm_medium=ppc&utm_source=adwords&utm_ term=&hsa_mt=&hsa_net=adwords&hsa_ad=564666141031&hsa_src=g&hsa_cam=145 67061057&hsa_kw=&hsa_grp=127713121155&hsa_tgt=dsa- 19959388920&hsa_ver=3&hsa_acc=8441935193&gclid=Cj0KCQjw8e- gBhD0ARIsAJiDsaVE6h7YOVIAwkhY8Zg- seKNtMcdCK4m2A517__XX9F6iRquK2pz2AEaAjzNEALw_wcBLinks to an external site.

Dalio, R. (2017, April). Ray Dalio at TED2017: How to build a company where the best ideas winLinks to an external site.Links to an external site. [Video]. YouTube. https://www.ted.com/talks/ray_dalio_how_to_build_a_company_where_the_best_ideas_ win

Peng, M. W. (2023). Global business (5th ed.). Cengage Learning.