Why Do Some Companies Like Apple Hedge Foreign Currency

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 naive, but instead, be open-minded to different perspectives. Dalio (2017) emphasizes the importance of diverse viewpoints and transparency in decision-making, especially in risk management and strategic planning for foreign exchange.

Shannon’s post highlights that companies that hedge their money must have the available cash upfront, which is influenced by the industry’s liquidity needs and operational practices. Grocery stores like Walmart tend to have high inventory turnover and low profit margins, making cash preservation crucial for their investment activities. Conversely, technology firms like Apple rely heavily on investments and debts to fund innovation, and they often keep low inventories on hand for quick sales. These differences illustrate why some companies choose to hedge or not—some seek stability, while others embrace risk for potential higher returns. Currency hedging involves expectations of future spot rates relative to forward rates (Peng, 2023, p. 235), but it can be costly and human resource-intensive.

Ultimately, the decision to hedge depends on forecasted currency rates, industry-specific cash flow needs, and strategic priorities. For instance, Apple might decide against hedging at times if projections suggest favorable currency movements, aiming for higher profits through market exposure. Based on Ray Dalio’s advice, the core principle is to gather diverse opinions, foster transparency, and be prepared to learn from mistakes. Dalio’s philosophy of radical transparency and systematic decision-making aims to mitigate biases and improve outcomes in foreign exchange strategy. Effective hedging requires not only financial insight but also a disciplined, collaborative approach that considers multiple perspectives to reduce uncertainties and optimize financial health.

Paper For Above instruction

Foreign exchange fluctuations pose significant risks and opportunities for multinational corporations like Apple and Walmart. The strategic decisions about whether to hedge foreign currency exposure depend on a variety of factors including industry characteristics, liquidity profiles, risk appetite, and corporate goals. Hedging is primarily motivated by the desire to protect foreign investments, stabilize earnings, and mitigate the financial impact of currency volatility on operational costs and revenues. Apple's approach exemplifies proactive currency risk management, especially as a firm heavily reliant on international markets. By hedging, Apple seeks to insulate itself from adverse currency movements that could erode profit margins or inflate costs, thereby supporting stable financial reporting and strategic planning.

Hedging can be an expensive proposition, involving transactions costs, administrative burdens, and strategic foresight. Large firms like Apple may weigh these costs against the potential benefits of currency stability. In contrast, many U.S. corporations, including Walmart, opt to forgo hedging because they believe currency fluctuations tend to even out over the long run, and the costs of hedging may outweigh the benefits. Walmart’s operational model, characterized by high inventory turnover and low profit margins, favors cash flow management over currency risk mitigation. This decision also reflects industry-specific risk profiles and the importance of operational stability over speculative currency positioning.

Ray Dalio’s insights on preparing for foreign exchange risk emphasize a systematic and transparent approach. As a hedge fund manager, Dalio advocates gathering diverse opinions and perspectives before making strategic decisions, which helps in understanding the full spectrum of risks and opportunities. His concept of radical transparency fosters an environment where strategies are scrutinized and refined through honest discourse. Dalio also recommends “betting against the consensus” when justified by evidence, suggesting that contrarian strategies can yield superior results if driven by empirical data rather than herd mentality. For foreign exchange strategies, this implies that firms should develop robust prediction models, continually monitor market conditions, and be willing to challenge prevailing assumptions to capitalize on mispricings or emerging trends.

Implementing effective currency hedging requires an integrated approach involving finance, risk management, and strategic planning teams. Firms should use forward contracts, options, and other derivatives to manage currency exposure according to their risk appetite and forecasted currency movements. Given the high stakes involved, decision-makers must balance the potential for higher profits against the costs and complexities of hedging. Dalio’s advice suggests that organizations should prioritize transparency, foster a culture of learning from mistakes, and remain flexible to adapt strategies as market conditions evolve. This disciplined, evidence-based approach can help companies like Apple optimize their currency risk management in a volatile global environment.

References

• Burton, J. (2018). Algorithms for simpler decision-making. The Decision Lab. Retrieved March 23, 2023, from https://thedecisionlab.com/
• Dalio, R. (2017). 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. Retrieved from https://risk
• Peng, M. W. (2023). Global business (5th ed.). Cengage Learning.
• Shannon’s post. (n.d.). The importance of liquidity and industry differences in currency hedging strategies.