The benefit of risk management via targeted financial instruments is that firms are able to
focus on a specific risk at a low cost without disrupting the firm’s operations. Ironically,this ability to precisely target risk is the source of its primary shortcoming: namely, risk
management using targeted financial instruments is effective only against the specific
risk it is explicitly targeted at. Therefore, a currency hedge will only protect against
earnings losses from exchange rate changes. Their targeted nature limits their effective
use to offsetting risks that managers are able to foresee both in type and magnitude. The
range of currently available contracts of course limits the feasibility of this application
tool.