StudentShare solutions
Triangle menu

Why might firms with exposure to foreign markets use foreign currency derivatives - Coursework Example

Extract of sample
Why might firms with exposure to foreign markets use foreign currency derivatives

A derivative is defined as ‘an instrument whose price is derived from, or depends on, the price of another asset’ (Hull 2009:779). When a company receives foreign currency against supply of services or goods to a foreign based importer, it acknowledges some kind of foreign exchange risk, since there is a possibility of fluctuation between currencies of both exporter and importer from the time of entering into the contract and receipt of funds from the foreign importer. Thus, in case of companies with substantial export earnings, it should assess the quantum of its forex exposure, create a road map for how to minimise that risk, to employ hedging strategies to minimise any substantial loss that may be encountered due to future forex fluctuations in the currencies where it is likely to receive from its foreign importers. (Bragg 2010: 207). For instance, if a company has quoted its export values in US$ and during the interval period where a foreign importer is under obligation to pay the exporter, if the dollar appreciates against the exporter’s currency, then the importer might be paying with a decreased –value currency, which creates the company to account for a foreign exchange loss at the time of receipt of funds. (Bragg 2010: 208). As per Froot, Scharstein and Stein (1993), if the level of capital investment of a company is high, the chance for employing forex derivatives in its risk management policy is always on the increase. (Froot, Scharstein and Stein 1993:1631). ...
ers of the international companies opt these derivatives so as to take the positions in the anticipation of revenues (speculation) or employment of these instruments to minimise the risk inherent with day to day management of their company’s cashflow hedging).( Aswathappa 2010 :543). The probable advantages from employing forex derivatives are reliant on the anticipated exchange rate movements. Thus, it is essential to comprehend why the exchange rate moves over time before employing the forex derivatives for risk coverage. Different Kinds of Forex Derivatives Forex Forwards: Forward is comprised of spot transactions that have been retained for less than 180 days but held over 48 hours when they due for payment and paid at the current prevailing spot price. If you minus the bid price with that of ask price, then you can arrive at the transaction cost. Forex swaps are financial transactions associated with the swapping of two currency amounts on a particular date and a reverse exchange of the analogues' amount at an afterward date. The main objective is to administer currency risks and liquidity by executing forex transactions at the most apt time. In fact, the underlying currency is borrowed and lent concurrently in both currencies, for instance, by selling Euro for US$ for spot value and consenting to reverse the deal at an afterdate. (Brickford& Brickford 2007:7) Forex Futures: A future can be illustrated as a standardised contract to sell or buy a particular asset at a price previously consented to and at a fixed future date. Forex futures are standardised financial instruments that are negotiated in organised markets. Forex futures have many probable benefits but also have many probable risks. Forex futures markets are not only heavily regulated but also ...Show more


As per Rawls and Smithson (1990), risk management is now employed by many multinational corporations to a large extent that outcomes of surveys showed that financial executives graded risk management as one of their foremost objectives.
Author : jimmykirlin
Why might firms with exposure to foreign markets use foreign currency derivatives
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the coursework on your topic
"Why might firms with exposure to foreign markets use foreign currency derivatives"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Exposure to Currency Risk: Definition and Measurement
Starting a new venture or moving to another country is not an easy task because the investor or the company not only has to face usual risk that a business faces but it has to deal with the exchange rate risk or translation risk (Gitman, 2003).
8 pages (2000 words) Coursework
Direct Foreign Investment
Research studies indicate that there is direct relationship between FDI and financial markets. According to the research studies, structural changes in financial markets have been used in attracting FDI. The general view is that stock markets have been established with the main reason of intermediating funds towards investment projects (Hui and Margarida 210).
8 pages (2000 words) Coursework
Efficiency of Foreign Exchange Market
One of the early theories of modern finance is the hypothesis of efficient markets. The efficient markets hypothesis tells that prices fully reflect information available to market participants. From the microstructure point of view, these participants are either hedgers or speculators.
10 pages (2500 words) Coursework
Derivatives and Alternative Investments
It is used by non-financial firms in the management of the interest rate risk of their corporate debt. Financial firms use the swaps market intensively in hedging the mismatch in the interest rate risk of their assets and liabilities. The liquidity of the swaps market also underpins the residential mortgage market in the United States, providing real benefits to the household sector.
14 pages (3500 words) Coursework
The task is to review EuroJet's foreign exchange exposure
One of the major challenge the company faces is risk associated with foreign exchange exposure. In this report, a comprehensive evaluation of the foreign exchange risk associated with Euro Jet’s operations has been carried out and approach for managing the same has been put forward.
14 pages (3500 words) Coursework
Foreign Currency Transactions
Separate accounting records are kept for each separate company, but not for the consolidated entity (Copeland, 2008). To determine the consolidated amounts, the amounts for the individual affiliated companies are added together. Elimination entries are made to remove the effects of inter-company transactions.
2 pages (500 words) Coursework
Faculty of Business Environment and Society
This trade finance can further be divided into two major categories, category one involve those that affects the person exporting before goods are dispatched and those that affects his position after the release of goods to the importer. Options
8 pages (2000 words) Coursework
Final Exam
Financial market instruments or alternatives takes place in money and capital market while operational strategies internal organizational strategies that are used by exporters to deal
10 pages (2500 words) Coursework
Foreign Security Analysis
This leads to a lower margin call. Also, on the same point, a diversified portfolio helps to mitigate the chances of a margin call. If the margin call is received, it means that the investor losses a 48% of his cash investments and he or
2 pages (500 words) Coursework
Foreign Ethics
The cultures of most of the people living in the rural areas value large families. By a large a family, I mean that couples have a tendency of bearing more than five children. They value having many children for both social
1 pages (250 words) Coursework
Comments (0)
Click to create a comment
Let us find you another Coursework on topic Why might firms with exposure to foreign markets use foreign currency derivatives for FREE!
Contact us:
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
Join us:
Contact Us