When companies are exposed to inflation, whether through their costs (labour, wages, construction costs, etc.), or through income (indexation of electricity sale contracts or rent, etc.), hedging against exposure to inflation can make a business plan watertight.
Before a decision can be made as to the advisability or feasibility of hedging against inflation risk, a company in this situation needs to answer several questions:
What is the source of exposure on the asset and liability sides, what are the inflation indices involved, to what extent do cost inflation and income inflation offset one another, and what is the ultimate net exposure?
How variable are the base amounts concerned (on the income side and cost side)?
Is it possible to hedge this net exposure using market instruments?
Some reminders about inflation and how inflation risk can be curbed or hedged.
