Financial risk is the risk a company faces due to its exposure to market factors such as interest rates, exchange rates, commodities and stock prices. Financial risks can mostly be hedged through the existence of large and efficient markets through which these risks can be transferred. This is different from operational risk, which is associated with more manufacturing and marketing activities. Operational risk cannot be hedged because these risks are not negotiated. In the case of GM, they used a passive hedging policy in which they hedged 50% of all significant foreign exchange risks arising from cash flows associated with ongoing operations. Passive hedging is used by very risk-averse businesses that want to be completely certain of their future cash flows by hedging a significant portion of their risk exposure. This can be achieved by setting a specific price, either through long-term contracts between a supplier and a buyer, or through a derivative contract such as futures, futures or swaps, available on most major commodity exchanges. In GM's case, they used futures contracts to hedge exposure occurring within six months. GM's long-term strategy is options, which allow it to buy or sell in the spot market without necessarily committing to a hedging contract. But such a method imposes a significant hedging cost in the form of option premiums that must be paid in advance at the time of hedging. The hedging strategy I chose is that of Southwest Airlines over the past decade. Through the third quarter of 2008, they had 69 consecutive quarterly profits dating back to 1991. By 2008, Southwest had covered more than 70% of its fuel needs at around $51 per barrel. Using a...... middle of paper ......mpany as a whole. They are not taking the calculated risks that other foreign automakers have taken in the past and they have been very slow to implement fuel efficient cars. Southwest has proven itself to be a very wise and intelligent player in the airline industry, even though it has posted losses over the last 2 quarters, this does not eclipse the streak of 17 consecutive years, which has allowed it to grow more than any other airline in the sector. . Southwest would be my favorite company to work with. Bibliography1: http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf2: http://news.morningstar.com/articlenet/article.aspx? id=2716693: http://www.chron.com/disp/story.mpl/business/steffy/6063444.html4: http://www.purchasing.com/article/CA6631782.htmlResourceshttp://www.usatoday. com/money/industries/travel/2008-07-23-southwest-jet-fuel_N.htm