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. Most financial risks can be hedged due to the existence of large and efficient markets through which such 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 traded. In GM's case, they used a passive hedging policy where they hedged 50% of all significant foreign currency exposures arising from cash flows associated with ongoing operations. Passive hedging is used by highly 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 through long-term contracts between a supplier and a buyer or through a derivative contract such as futures, forwards or swaps, available on most major commodity exchanges. In GM's case, they used forward contracts to hedge the resulting exposure within six months. GM's long-term strategy is options, which allows them to buy or sell in the spot market without necessarily committing to a hedging contract. But such a method imposes a heavy hedging cost in the form of option premiums that must be paid upfront at the time of hedging. The hedging strategy I chose is that of the Southwest Airlines strategy of the last ten years. Through the third quarter of 2008 they enjoyed 69 consecutive quarterly profits dating back to 1991. In 2008 Southwest had more than 70% of its fuel needs covered at about $51 a barrel. Using a… medium of paper… a company in general. They do not take the calculated risks that other foreign automakers have taken in the past and have been very slow in implementing any type of fuel-efficient automobile. Southwest has proven to be a very wise and intelligent player in the airline industry, even though they have posted losses for the last 2 quarters, this does not overshadow the 17 consecutive years, which has allowed them to expand more than any other airline in the industry. Southwest would be my favorite business 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