Foreign Currency Risk (3) Flashcards
What are currency futures?
A contract to purchase or sell a standard quantity of a currency by an agreed future date or specified exchange rate
Similarity to currency futures and forward contracts?
They fix the exchange rate to use in the future
How are currency futures traded/
On a market and mainly available from US markets
Currency future characteristics?
Contract fixes the exchange rate on a large amount of currency
Contract expire at the end of each quarter but can be used on any date up to the expiry date
SHow does a futures contract differ from a forward?
A futures contract is separate from the actual transaction
What if company makes an exchange loss on a transaction?
It will make a profit in futures market to compensate for this
What if company makes an exchange profit on a transaction?
It will make a loss in the futures market
When there’s fluctuatuing exchange rate in currency futures?
The outcome is fixed
First step in foreign currency receipt in a futures transaction?
Enter into futures contract to sell foreign at a fixed rate
Contracts should be due to be fulfilled on a standardised date after transaction date
Second step in foreign currency receipt in a futures transaction?
Complete the actual transaction on the spot market
Third step in foreign currency receipt in a futures transaction?
Entering into contract to buy foreign
Any profits or losses arising in the future?
Will offset the impact of exchange rate movements on actual transaction that is being hedged. Outcome is fixed whatever happens to exchange rate
What if foreign devalues in a futures?
Gain in future but there’s exchange loss in actual transaction
What if foreign increases in value in a futures?
Loss on the future but there’s exchange gain in actual transaction
Advantage of currency futures (fliexibility)?
Future are valid for a specific period of time. More flexible than forward as forward is only valid for one day
