Introduction to Corporate Finance

INTRODUCTION TO FINANCIAL

RISK MANAGEMENT

23-1 Overview of financial risk management

23-2 Forward contracts

23-3 Futures contracts

23-4 Options and swaps

23-5 Financial engineering

what companies do

GOOGLE’S EARNINGS BOOSTED BY HEDGING PROGRAM

When Google held its second quarter 2011

earnings call, most participants focused on the

company’s record quarterly net income of $9 billion,

a jump of 32% from the prior year. For a relatively

young company, Google generated a remarkable

54% of its revenues in overseas markets. With

Google doing such a large amount of business in

foreign currencies, Patrick Pichette, then Google’s

chief financial officer, had responsibility for

developing and managing the company’s currency

hedging program. Ideally, Google’s currency

hedges would help offset fluctuations in the value

of the US dollar against the other currencies in

which Google engages in transactions. In the

earnings call, Pichette reported that the company’s

foreign currency hedging transactions increased

by 29%, roughly in line with the growth in overseas

business volume. The company reported a small

net gain on its hedging program for the quarter,

but the main purpose of Google’s hedging was

not to increase the company’s bottom line, but

rather to insulate it from excessive volatility due to

currency movements.

Source: ‘Google’s CEO Discusses Q2 2011 Results – Earnings Call Transcript’,

SeekingAlpha.com, 14 July 2011: http://seekingalpha.com/article/279555-

googles-ceo-discusses-q2-2011-results-earnings-call-transcript.

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