Mitigating Financial Risks

2 Background Literature Review The studies that have been done earlier about hedging and financial risk management have led to different findings. Some researchers have unveiled that financial risk management is a good tool for limiting the risk exposure of a company. There are also studies that affirm that companies may not have to use the hedging strategies to handle the financial risks that are apparent on the market. Even though theoretical literature pinpoints the reasons why firms are supposed to hedge, there is a need for empirical studies to support such theoretical findings.

Some of the studies did not unveil the usage of the hedging tools in the various corporations. For instance, Fabozzi, Mann, and Choudhry (2003) selected companies that do not use the hedging strategies (non-hedgers) and those that use the hedging strategies. The sample was determined by searching for financial databases. Eiteman et al. (2003) used firms with the foreign exchange rate exposure and labeled them as hedgers after finding after establishing references to the derivative instruments in their financial statements. However, it should be noted that making a comparison between the non-users and derivative users in order to infer about hedging can lead to a wrong classification whereby the hedgers will be deemed to be non-hedgers while the speculators will be regarded as hedgers.

The model and/or empirical analysis A quantitative approach was widely adopted for the study. The qualitative approaches emphasize words as opposed to the quantification of information when it comes to the analysis and collection of information. Such studies intend to utilize an inductive approach in constructing the relationship between research and theory, where there is an emphasis on the generation of theory. However, this study is more tailored towards testing the existing theories as