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Hi, Sir:
from BPP revision kit, I found one sentence that: “hedging reduces the firm’s volatility with regards to market ris (that is, exchange rates, interest rates and hence beta)” . Does it mean that hedging can reduce the systematic risk of the firm? Thanks
Yes in effect, it can (although I am a bit surprised if BPP say this without explaining properly).
Trading in options is one way they could hedge (by making sure that if the value of the firm went down then the options deal made a profit).
It does not make the risk of the actual business of the firm any different, but it will affect the risk of the company overall.
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