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Risk Considerations

The two approaches can also be contrasted on the basis of the risk involved.

Hedging Approach

The hedging approach is more risky in comparison to the conservative approach. There are two reasons for this. First, there is, as already observed, no NWC with the hedging approach because no long term funds are used to finance short term seasonal needs, that is, current assets are just equal to current liabilities. On the other hand, the conservative approach has a fairly high level of NWC. Secondly, the hedging plan is risky because it involves almost full utilization of the capacity to use short term funds and in emergency situations it may be difficult to satisfy the short term needs.

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