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Active Strategic Management

  • Wealth Management / Financial Planning

    Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. Contact a Paisley Financial Associate to learn more about how we can provide for you. 

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  • 401 K Plans

    A 401k retirement plan is a special account funded through pre-tax payroll deductions. Funds in the account can be invested in stocks, bonds, mutual funds or other assets, and are not taxed on any capital gains, dividends, or interest until withdrawn.

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  • IRA Rollovers

    An IRA is an Individual Retirement Account, and provides either a tax-deferred or tax-free way of saving for retirement. There are many varieties of IRA's please read more on the link below to see which is right for you.


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  • Corporate Hedging & Consulting

    Paisley Financial works with businesses to identify their risk exposure. We create tailored risk management products through the use of Futures, Options and other instruments that mitigate these risks and protect operating margins.

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  • Educational Plans

    A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. Many different plans exist. Learn more to see which is right for you.


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  • Alternative Investments

    Alternative investments are instruments such as Physical Gold,  Managed Futures (commodities, oil, gold, etc..) which can be used as a hedge against a securities portfolio as an inflation hedge. Check out the many varieties on the link below.


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  • Independent Research

    Paisley Financial provides timely and accurate research on markets, companies and industries. Our team offers more than three decades of experience as well as time held relationships with industry experts that will bring the highest quality of knowledge to our customers.

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Corporate Hedging

In finance, corporate hedging is establishing a position in one market in an attempt to offset exposure to price fluctuations in some opposite position in another market with the goal of minimizing one's exposure to unwanted risk.

The ideal hedge would reduce the risk to nothing but the cost of the hedge. For example, if the dollar falls, U.S. companies may struggle and investors tend to hedge their portfolios with a futures contract in Gold or other Currency. This is because when the dollar loses value, the other commodity's value increases, thus driving the price of it upward. The point of the hedge is not to profit from it but to offset any loss in underlying asset.

An effective hedging program does not attempt to eliminate all risk. Rather, it attempts to transform unacceptable risks into an acceptable form. The key challenge of risk management is to determine the risks the company is willing to bear and the ones it wishes to transform by hedging. The goal of any hedging program should be to help the corporation achieve the optimal risk profile that balances the benefits of protection against the costs of hedging.

Operating risks cannot be hedged because they are not traded. Financial risk can and is the risk a corporation faces due to its exposure to market factors such as interest rates, foreign exchange rates and commodity and stock prices. Most companies will find they are rewarded for taking risks associated with their primary business activities. Items such as product development, manufacturing and marketing, however, will find they are not rewarded for taking risks because they are not central to their basic business, as mentioned above.

Another critical factor to consider when determining which risks to hedge is the materiality of the potential loss that might occur if the exposure is not hedged. Unless the potential loss is material or large enough to severely impact the corporation's earnings the benefits of hedging may not outweigh the costs, and the corporation may be better off not hedging.

Hedging Misunderstandings

The issue of whether or not to hedge risk continues to confuse many corporations. At the heart of the confusion are misconceptions about risk, concerns about the cost of hedging, and fears about reporting a loss on derivative transactions.

One reason corporate risk managers are sometimes reluctant to hedge is because they associate the use of hedging tools with speculation. They believe hedging with derivatives introduces additional risk. In reality, the opposite is true. A properly constructed hedge always lowers risk. It is by choosing not to hedge that managers regularly expose their companies to additional risks.

Another reason for not hedging is the fear of reporting a loss on a derivative transaction. A fixed-rate swap, for example, is a substitute for the issuance of a fixed-rate bond. Regardless of market conditions, the swap's cash flows will mirror the bond's. Thus, any money lost on the swap would have been lost if the corporation had issued a bond instead. Only if the swap's performance is evaluated in light of management's original objective by duplicating the cash flows of the bond will it become clear whether or not the swap was successful.

Other reasons corporations avoid hedging is a lack of familiarity with derivative products. Some corporations view derivatives as instruments that are too complex to understand. The fact is that most derivative solutions are constructed from two basic instruments: forwards and options, which comprise the following basic building blocks:

Forwards Options
- Swaps - Caps
- Futures - Floors
- FRAs - Puts
- Locks - Calls

The manager who understands these will be able to understand more complex structures which are simply combinations of the two basic instruments.

Why Hedge?

Financial risks exist in every business and the corporation who opts not to hedge is betting that the markets will either remain static or move in his favor. Another example is a U.S. computer manufacturer with French franc receivables, that decides to not hedge its exposure to the French franc is speculating that the value of the French franc relative to the U.S. dollar will either remain stable or appreciate. In the process, the manufacturer is leaving itself exposed to the risk that the French franc will depreciate relative to the U.S. dollar and hurt the company's revenues.

Proper hedging is never based on profit speculation as some people may believe. Some attempt to construct hedges on the basis of their outlook for interest rates, exchange rates or some other market factor. However, the best hedging decisions are made when risk managers acknowledge that market movements are unpredictable. A hedge should always seek to minimize risk. It should not represent a gamble on the direction of market prices.

Conclusion

A well-designed hedging program reduces both risks and costs. Hedging frees up resources and allows management to focus on the aspects of the business in which it has a competitive advantage by minimizing the risks that are not central to the basic business. Ultimately, hedging increases shareholder value by reducing the cost of capital and stabilizing earnings. If you would like to learn more about how hedging can help mitigate your company's' risk, feel free to contact a Paisley Advisor to set up a consultation.

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