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International Finance : Forward Contrats, Currency Futures
Finance & Accounting
Pages 5 (1255 words)
Question 1 The biggest threat that arises in the business of imports and exports is about the volatility of the exchange rates. The companies that import goods have the risk of the depreciation of their home currency, for that case they have to pay more to buy thee foreign currency because the ultimate payment has to be made in the foreign currency.
In the current scenario, a UK-based corporation namely as Mega Company is exporting a machine to the US-based corporation, Bestway Enterprises for a sum of $500,000. This receipt is going to be received by Mega Corporation after around 3 months. So, Mega Corporation here faces a risk of strengthening the domestic currency which is Pound Sterling against US Dollars. If Pound Sterling appreciates, then there will be less amount of money would be converted in to Pound Sterling from US Dollars. So in order to combat with the exchange rate fluctuations, there are different sorts of strategies available, called as hedging strategies which are used by the corporations to reduce the element of exchange rate volatilities. Some of these strategies are listed as under: Money Market Operations Lead Payments Netting Forward Contracts Future Contracts Options In the following discussion, only Forward Contracts and Future Contracts are discussed in detail: Forwards Contracts Forward Contracts are the ones in which an agreement is made between the parties regarding the future exchange rate. The future exchange rate is set now and the parties to contract will deliver the currencies at the rate determined at the time of contract. ...
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