Critical examination of exchange rate changes on the financial Essay

Critical examination of exchange rate changes on the financial performance of Honda Motors - Essay Example Having clearly outlined the risk management framework for Honda as its financial strength pillar, it is important to highlight the limitations in achieving results with such policy initiatives. According to Guay and Kothari, there is a huge â€Å"difference† between the amount of money that a firm wants to hedge with derivatives, and the amount that it actually succeeds in hedging. In previous section, we discussed the relative importance of different hedging options for Honda’s case. But, it is not an easy route as it is fraught with some practical limitations, which we shall study on an individual case by case basis. 1. Continuing with financial instruments as primary safeguards: Three major problems with financial instruments are inconsistency, asymmetry and indeterminacy. Inconsistency refers to the wide gaps in hedging schemes with a complicated web which can make auditing a difficult task. Asymmetry refers to the unreliable nature of the entries itself, and indete rminacy refers to the probability of fraudulent data entry. If these problems with financial instruments are not sorted out in the beginning itself, it could lead to a colossal financial disaster, the likes of Nick Leeson.