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Finance & Accounting
Pages 8 (2008 words)
International Finance Contents Contents 2 Introduction 3 Brief Introduction of the Case 4 Application of Forward Contracts & Currency Futures 4 Forward Contract Hedge 5 Future Contract Hedge 6 Critical Analysis of Currency Forward & Currency Futures Contracts 6 Analysis of the Hedge using future Spot Rates 8 Effect of Inflation on Hedging 8 Conclusion 9 References 11 Bibliography 11 Appendices 12 Introduction This project includes the analysis of the Lorient Enterprise’ foreign currency payables by hedging using the currency forward and currency futures.
For example a company that wishes to go long in forward contract agrees to buy the asset or good at a specific future date i.e. maturity date for a forward price determined at the initiation of the contract. At the maturity the forward price should equal the spot price of the underlying asset because the equilibrium forward price continually changes during the contract period in such a manner that the forward contract will always have zero value in the beginning of the contract because no initial payment is required. A futures contract is similar to forward contract in the manner that there is a specified maturity date, price, and the futures price should equal to the spot price at maturity. The value of futures contract is also zero initially. However the difference lies in the treatment of changes in prices during the contract period. The contract is marked to market and the party in whose favour the price is moved must be paid the amount of change by the losing party. This mechanism ensures that there is no counter party risk. This is known as margin call. ...
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