Tricia's Post: Why Do Some Companies Like Apple Hedge Foreig

Tricias Post Why Do Some Companies Like Apple Hedge Foreign Currency

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 or 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 win. [Video].

YouTube. GTreasury. (n.d.). 10 Reasons Why Companies Hedge Foreign Currency Risk. 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 hand 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 our intuitive impulses.

Paper For Above instruction

The strategic decisions companies make regarding foreign currency hedging are driven by a complex combination of financial, operational, and managerial factors. An illustrative example is Apple Inc., a technology giant whose multinational operations expose it to significant currency risks. These risks stem from fluctuations in foreign exchange rates that can influence revenue streams, operating costs, and overall profitability. The decision to hedge or not hinge on assessing these risks alongside costs, industry practices, and internal financial strategies. Companies like Apple actively hedge their foreign currency exposures to safeguard their global investments against adverse currency movements, while others like Walmart prefer a more passive approach due to industry characteristics and financial constraints.

Apple’s approach to currency hedging is primarily motivated by its substantial international revenue and the volatile nature of forex markets. When the US dollar appreciates significantly, Apple faces increased costs in foreign markets, compressing profit margins. To mitigate this, Apple employs forward contracts, options, and other hedging instruments to lock in exchange rates, thus protecting its revenue projections and earnings from currency swings (Peng, 2023). Such practices allow the firm to ensure more predictable financial statements, which are crucial for investor confidence and strategic planning. Conversely, Walmart, which operates on a model of high-volume sales with low profit margins and high inventory turnover, tends to avoid the additional costs associated with hedging foreign exchange risk. Its industry structure favors stability over speculative currency management, with the company relying more on operational efficiencies and currency exposure naturally mitigating (Peng, 2023). The industry context—technology versus retail—fundamentally influences the hedging behavior of these firms.

Ray Dalio, a renowned hedge fund manager, offers insights into understanding and managing risk that can be applied to foreign currency strategies. In his TED talk, Dalio emphasizes the importance of diverse perspectives, radical transparency, and evidence-based decision-making. He advocates for approaching risk with an open mind, gathering opinions from multiple sources before making informed choices. Dalio also advocates for “betting against consensus” when supported by strong evidence, which aligns with the idea of challenging prevailing market assumptions in currency strategies. When applied to forex hedging, this approach would advise firms and investors to rigorously analyze macroeconomic indicators, geopolitical developments, and market sentiment to develop resilient strategies (Dalio, 2017). Furthermore, his emphasis on embracing mistakes as lessons underscores the importance of flexibility and continuous learning in risk management.

The application of Dalio’s principles extends beyond investment to corporate forex strategies. For example, a company might analyze different scenario forecasts for currency movements, incorporate diverse expert opinions, and remain transparent about assumptions and risks. This collaborative, disciplined approach can prevent overreliance on simplistic forecasts, reducing potential losses from adverse currency movements. Moreover, Dalio’s concept of “wealth being built on sound risks” underscores that strategic hedging involves calculated exposure rather than avoidance. Companies should aim for a balanced approach—hedging enough to reduce risk but not so much that they stifle potential gains—aligning with industry needs and financial capacity (Peng, 2023). Ultimately, integrating Dalio’s insights into corporate risk culture promotes more robust and adaptive foreign exchange strategies.

Furthermore, the differences in industry needs highlight why some firms hedge actively and others do not. High liquidity firms like Apple, which face significant foreign exchange risks due to their international revenue base, find hedging essential to maintain market stability and investor confidence. Meanwhile, retail chains like Walmart, with their predictable cash flows and operational model, often forgo hedging because the costs outweigh the benefits or because natural currency exposures serve as sufficient risk mitigators. This strategic divergence underscores the importance of contextualized decision-making in financial risk management, aligning with both industry characteristics and corporate objectives. Ultimately, applying the risk management principles advocated by Dalio and integrating industry-specific factors helps firms create resilient hedging strategies capable of navigating volatile forex markets and stabilizing financial performance in global operations.

References

• Burton, J. (2018, October 22). Algorithms for simpler decision-making (2/2). The Decision Lab. https://thedecisionlab.com/insights/analytics/algorithms-for-simpler-decision-making/
• Dalio, R. (2017, April). Ray Dalio at TED2017: How to build a company where the best ideas win. [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.
• GTreasury. (n.d.). 10 Reasons Why Companies Hedge Foreign Currency Risk. https://gtreasury.com/10-reasons-why-companies-hedge-foreign-currency-risk
• Additional credible sources exploring currency risk management and corporate hedging strategies, including empirical studies and industry reports, would be added here for comprehensiveness.