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debt, but might help a pension fund that is about to invest in bonds. A rising dollar benefits American
importers but hurts American exporters. The first step in risk management is to identify the exposures.
Once the exposures are identified, one should narrow the search for an appropriate hedge to the set
of derivatives that compensate the firm when the adverse scenario is realized. For example, an airline
that purchases jet fuel will see higher costs when the price of oil rises. The airline should look for
derivatives that pay off when oil prices rise. Thus, the airline should consider a long position in an oil
futures contract, or a long oil forward, or an oil call option. A bank that suffers losses when interest
rates rise should consider a short position in a bond future or forward, bond put options, or the fixedpayer
side of an interest rate swap. An exporter that expects to receive Mexican pesos might wish to
go short in peso futures or forwards, or buy peso puts.
The next step is to choose from among futures, forwards, options, and swaps. This is perhaps the
trickiest part of the analysis. To guide the selection, it is helpful to categorize the risks and the
instruments as either symmetric or asymmetric. Futures, forwards, and swaps are symmetric hedging
instruments, in that they pay off money if prices move in one direction, but incur losses if prices move
in the opposite direction. Options, by contrast, are asymmetric hedging instruments. They pay off
money if prices move in one direction, yet result in no cash outflows if prices should move the other
way. A symmetric risk is one in which the firm is hurt if underlying prices move one way but benefits
if prices move in the opposite direction. An asymmetric risk is one in which the firm is hurt if prices
move in one direction, but the firm does not benefit appreciably if the price moves in the other
direction. For example, a firm that exports to Japan and receives payment in yen benefits when the
value of the yen rises, but is hurt when the yen falls in value. This foreign exchange risk is thus
symmetric. The symmetric foreign exchange risk can be eliminated almost completely with a
symmetric instrument such as a future or forward, not an option.
A portfolio manager invested in stocks also faces a symmetric risk. The portfolio benefits if stock
prices rise, and loses money if stock prices fall. The portfolio manager, however, might wish to
modify the exposure in an asymmetric way, insuring against losses on the downside while maintaining
the potential for upside appreciation. An asymmetric instrument, a put option, would be the
appropriate hedge instrument in this case, since an asymmetric instrument converts a symmetric risk
into an asymmetric exposure.
An automobile leasing company is an example of a commercial venture that faces an asymmetric
risk. If interest rates rise, the firm‟s interest expenses rise. If the firm tries to offset these higher costs
by charging higher prices to customers, the firm would lose business. However, if interest rates fall,
buying an automobile on credit becomes a more attractive substitute for leasing unless the leasing
company also lowers its prices. Thus, the leasing company suffers when rates rise, but does not benefit
when rates fall. An asymmetric hedge such as a bond put option would be the best choice of
instrument in this case. The bond put option will pay off when rates rise, but will not require a cash
outflow when rates fall.
The key to choosing between symmetric and asymmetric instruments is to first identify the nature
of the risk that is faced, and then choose the type of instrument that will modify the risk appropriately.
A symmetric risk can best be eliminated with a symmetric instrument. An asymmetric risk can best be
eliminated with an asymmetric instrument. A symmetric risk can be turned into an asymmetric
exposure with an asymmetric instrument.