In the long run, either a business is economically viable or it will fail. No amount of hedging can change this simple fact. Nonetheless, by hedging over the near term, a firm gives itself time to adjust its operations and thereby adapt to new conditions without expensive disruptions. So, drawing our discussion in this section together, we can say that, by managing financial risks, the firm can accomplish two important things. The first is that the firm insulates itself from otherwise troublesome transitory price fluctuations. The second is that the firm gives itself a little breathing room to adapt to fundamental changes in market conditions.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

23. Risk Management: An Introduction to Financial Engineering

© The McGraw-Hill Companies, 2002

CHAPTER 23 Risk Management: An Introduction to Financial Engineering

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