1) b) 2) Why companies need to hedge currency exposure and critically discuss whether companies should use derivatives. MNEs possess a multitude of cash flows that are sensitive to changes in exchange rates, interest rates, and commodity prices. These three fincncial prices risks are the subject of the growing field of financial risk management. Hedging protects the owner of the existing asset from loss however, it also eliminates any gain from an increase in the value of the asset hedged against. According to ( เล่ม เหลือง โลก หน้า 201) cite the hedging reasons into 4 majors. Firstly, Reduction in risk in future cash flows imrove the planning capability of the firm. When the firm canpredict future cash flows accurately, firm able to undertake specific investment. Secondly, Reduction of risk in future cash flows reduces the likelihood that the firmscash flows will fall below a necessary minimum. Thirdly, Management has a comparative advantage over the individual shareholder in knowing the actual currency risk of the firm. Lastly, markets are usually in disequilibrium because of structural and institutional imperfections, as well as unexpected external shocks. According to u1 There are several key instruments, collectively known as derivatives. That are commonly used to hedge. These include: forward rate agreements (FRAs), interest rate futeres, options and swaps. However, these instruments not only reduce risk, they can supplement the profit generated by traditional banking methods as a speculative heddging. Furthermore, hedging these cash flows narrows the distribution of the cash flows about the mean of the distribution. Currency hedging reduces risk however, reduction of risk is not the same as adding value or return. You can see on the graph from (u1) {draw:frame} This graph show that the value of the firm would be increased only if hedging actually shifted the mean of the distribution to the right. Hedging still have a cost, therefore the cost of...