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International Finance: the case of Lorient Enterprises - Essay Example
Finance & Accounting
Pages 8 (2008 words)
This research includes the analysis of the Lorient Enterprise’ foreign currency payables by hedging using the currency forward and currency futures. The foreign currency payable is due within three months. The paper includes the hedges using forward contract and futures contract. …
This study has tried to analyze the hedging requirement of Lorient Enterprise, based in France that is engaged in transactions with U.S. based company Washington Technical Inc. The company has payables to be made within three months and expects that EUR would depreciate against USD. The currency forward contract compared to currency futures has been identified to be a suitable hedge for the company because its payment date is not aligned with the maturity of the futures contract and the forward contract can be tailor-made according to the company’s requirements. However it has been found that the forward hedge has not been a successful hedge because in the three months period EUR moved against the expectations of the company. Therefore the company has incurred losses in hedging. Various merits and demerits of the currency forward contracts and currency futures contract have been discussed. The forward contracts are suitable to those firms that have specific requirements in terms of maturity and contract size. The futures contracts are standardized contracts with standard contract size such as 125,000 euro in one futures contract. If the expected inflation in France is high relative to U.S. then according to the Purchasing Power Parity theory EUR is likely to depreciate against USD in future. Overall these factors determine the foreign currency movements and the hedging decision should be based on such factors. ...
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