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Market-based derivatives contracts have limitations in hedging against certain types of risks, particularly those that are not easily identifiable or quantifiable. These contracts are typically designed to hedge against specific, measurable risks such as changes in exchange rates or commodity prices. However, they may not be effective in hedging against more unpredictable or intangible risks, such as political instability, regulatory changes, or sudden market disruptions. In such cases, maintaining a healthy cash balance can be a more effective risk management strategy, as it provides a buffer against unexpected events.
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Purnanandam meditates on the question of what can the managers do to control risks that are not even identifiable? "Unlike exchange rates or commodity prices, there are no market-based derivatives contracts that can be used to hedge such a threat," Purnanandam writes. He's answer is cash balance. Cash balance is the best vaccine against unpredictable events such as the pandemic, Purnanandam writes. Moreover, he believes that cash is actually the best hedge against any risk that cannot be identified or quantified ahead of time. So in case of Apple, a $200 billion pile of cash is what makes it resistant to the risk.
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Set expectations and be prepared for different outcomes at all times. Our Risk Management presentation allows you to outline ways to monitor and contr...
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