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Analytical Application Essay
Finance & Accounting
Pages 5 (1255 words)
Analytical Application In case of imports and exports, the biggest danger that organizations generally face is that of adverse movement of the exchange rates. Since the payments and receipts are normally due in the near future, therefore, organizations do not have any control over the foreign exchange rates.
Each hedging strategy has its own pros and cons. This analysis explicitly focuses on the use of currency future contracts as a hedging strategy to mitigate the likelihood of adverse foreign exchange movements. There are three scenarios that are highlighted in the following discussion. 1. Hedging against Payables Currency future contracts allow organizations to trade in the respective currencies in which payments and receipts are to be made. These currencies are traded in the form of contracts such that each contract is composed of certain units of a particular currency. In this scenario, the currency is the Euro and the reference currency is assumed to be US Dollars. Therefore, one contract of Euro consists of €125,000. So in order to hedge the payment of around €500,000, the number of Euro contracts required for hedging are 4 i.e. (€500,000/€125,000). In case of payment, the standard hedging strategy would be to buy four Euro future contracts expiring in June as the conventional period of contracts is three months such that March, June, September and December future contracts are available for trading. As the payment is to be made in three months from now, therefore, June future contract would be the most suitable contract in this regard. ...
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