How and why do companies hedge?

Should companies use derivatives to hedge? How and why do companies hedge?
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Should Companies Use Derivatives to Hedge?
Over the last several decades, the use of derivatives as a tool to mitigate and control risk has expanded significantly. Despite well-publicized abuses involving derivatives, the efficacy of derivatives as a means of managing economic and other forms of risk remains widely accepted. The evolving mix of users of derivatives in the last ten years has also impacted the derivatives landscape. Traditionally, commercial hedgers such as processors, mills and large corporations used derivatives to manage risks; today, while commercial hedgers remain active, much of the increase in volume in derivatives is attributable to non-traditional end-users, such as public companies, which have been active users of derivatives, most notably interest rate and foreign currency hedging instruments.

[@motas92]

Very interesting, would love to know how much companies really benefit from hedging, I work in the chemical industry and it doesn't look like we do. I'm curious about the spread of the practice in other industries! keep it up! its very valuable to hear form real examples

[@andytolle4352]

Thank you Patrick. On the question of related topics, I would be interested in learning about assessing risks and rewards when it comes to hedging... It may be a difficult topic to cover, since I guess it would only make sense with specific examples, but I guess a few specific cases/examples would drive the point home about when it makes sense to hedge and when it does not, and how to spot the difference between about whether or not it makes sense. Like in a way hedging is a form of diversification, but then it becomes mostly between finding the balance of managing risks, but not completely diluting potential rewards.

[@poohshmoo9892]

I think it make sense company to hedge production when there is alot of competition in the market .. and when there is cartlel it there is no need to hedge ... while the opposite for company that need to consume the product , it should hedge when dealing with cartel and not hedge when production is well diversified .... no ??

[@seneca983]

The creditors of a company should prefer that the company hedges because they can't usually benefit from the upside of the lack of a hedge. Theoretically, a company could also use more leverage when they use hedging (and ordinary insurance) because then adverse events are less likely to take them underwater. Not sure if that works in practise.

[@jeevanchand2346]

very informative thanks

[@bbkelly2010]

I didn't raise my hand....

[@abcnikhiltripathi]

White color suits Patrick!