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Answer Posted / vikesh bansal
it is a risk reducing investment strategy involving
transactions of a simultaneous but opposing nature so that
effect of one is likely to counterbalance the effect of
other. With reference to appropriate financin mix,the term
hedging can be sid to reffer to process of matching
maturities of debt with maturities of financial needs. This
approach to the financing decision to determine an
appropriate financing mix is, therefore, also called as
matching approach.
acording to tjis approach, the maturity of the sources of
funds should match the nature of the assets to be
financed.for the purpose of the analysis, the current
assets can be classified into two broad classes:-
1) those which are required in a certain amount for a given
level of operation and, hence, do not vary over time.
2) those which fluctuate over time.
the hedgindg approach suggests that long term hands should
be used to finance the fixed portion of the current assets
requirements as spelt out in (1) above, in a manner similar
to the financing of fixed assets. the purely temprarily
requirements, that is, tyhe seasonal variations over above
the permanent financing needs should be appropriately
finanaced with short term funds(current liabilities). This
approach, therefore, divies the requirements of the total
funds into permanent and seasonal components, each bein
financed by different source.
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