A Trade off Between the Hedging and Conservative Approaches
It has been shown that the hedging approach is associated with high profits as well as high risk, while the conservative approach provides low profits and low risk. Obviously, neither approach by itself would serve the purpose of efficient working capital management. A trade off between these two extremes would give an acceptable financing strategy. The third approach trade off between the two approaches strikes a balance and provides a financing plan that lies between these two extremes.
The exact trade off between risk and profitability will differ from case to case depending on risk perception of the decision makers. One possible trade off could be assumed to be equal to the average of the minimum and maximum monthly requirements of funds during a given period of manage. This level of requirement of funds may be financed through long run sources and for any additional financing need, short term funds may be used. The breakdown of the requirement of funds of the Hypothetical Ltd between long term and short term sources under the trade off plans is shown in Table.
Trade off Between Hedging and Conservative Approaches