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Key Term: Hedging

The key term for week four forum will discuss hedging. I chose this topic because I thought it would be insightful to discover hedging procedures that protect businesses in Italy from increase or decrease in the exchange rates of currency. As for emerging markets, many companies in Italy including State Railways, Autostrade and BT’s Albacom, are getting into the telecoms market as infrastructure and service suppliers. (Cazzani, p. 65) Hedging is defined as measures taken by a company or corporation to protect itself from loss that may occur because of fluctuations in the exchange rate of currency. International corporations that operate globally conduct the majority of hedging in global markets. Our text also pointed out a very important fact to be mindful of while hedging, in that, although hedging may guard against loss, it may significantly destroy potential for great unexpected profits. (Satterlee, p. 145) So I would caution companies in deciding to engage in hedging because it may cause them to lose out tremendously in the future.

Speaking of some of the dangers of hedging, the article chosen for summarization discussed when proxy hedging goes badly. We all know that as time changes, so do global markets. And these changes can have adverse effects on corporate treasurers.

For a while the Deutsche mark has served well as a proxy hedge for other currencies. However, overtime a good portion of European currencies decided to leave the Deutsche mark which resulted in long-standing exchange rate agreements becoming obsolete. (Stein, p. 1) Other hedgers also saw this and followed suit.

In the fall, the British pound, Italian lira, Spanish peseta and Portuguese escudo all traded within explicit confines forecasted by the Exchange Rate Mechanism (ERM). (Stein, p.1) Basically, as necessities of the economy broke down within the ERM

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