StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Currency Future Contracts - Essay Example

Cite this document
Summary
Currency futures contracts Name Instructor Task Date Introduction This paper presents an assessment of the currency futures contracts. The assessment covers on the following: types of future contracts currently traded on the CME; whether the currency prices have risen of fallen in the recent past; factors that influence the future prices; and other general issues relating to the currency…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.8% of users find it useful
Currency Future Contracts
Read Text Preview

Extract of sample "Currency Future Contracts"

Download file to see previous pages

Some buyers and sellers of the instrument used it for speculation. The named instruments are not only used to hedge against unfavorable movements in the value of currency but also in other economic factors such as interest rate, exchange rates and natural calamities (CME group, n.d .). These contacts are reliant on some underlying assets thus are called the derivatives. First, swap is a derivative that involves an agreement between two or more traders to exchange the denomination of their cash flows.

For instance, consider two investors from the US and the UK, who have invested in the local government securities. The two investors would agree that the US investor receives the cash flow of the UK investor, denominated in Sterling pound. The same would happen to the UK in investor. Secondly, an option is a contract that grants the buyer rights but not an obligation to participate in the contract, on maturity. On the other hand, the contract obliges the seller to participate when the contract matures.

Thirdly, a forward is a contract between the counterparts to exchange currencies at a predetermined exchange rate. That is, the parties agree to exchange their currency at a given exchange rate agreed now, but during a future transaction, say after one year. Lastly, a future is a contract between parties to exchange currencies in the future, at a pre-determined rate. The nature of the contract is similar to that of forwards. The only difference is that futures are exchange traded whereas; the forwards are traded over the counter (CME group, n.d .).

Have the current future prices fallen or risen? In the recent past, the currency future prices have demonstrated a downward trend. The reduction of the prices is said to have been caused by a high level of uncertainty about the future prices. Another reason for the fallen prices is the deteriorating US economy (CME group, n.d .). Types of exposures Most companies sign future contracts mainly to hedge against the unfavorable move of the exchange rates. A volatile exchange rate presents an environment that is too risky for businesses to operate.

The risks are categorized into a transaction, operating and translation. A transactional exposure arises from the various trading activities that a company engages in. Globalization has made the world a small village where companies in the various parts of the world are well connected. The process of globalization has facilitated the sharing of resources between different companies. Businesses that operate in the international markets face greater risk of future price movements. This is because they borrow, lend and invest in those markets using foreign currencies.

It is from the trading activities of a business that transactional risk arises. Secondly, operating risk is the adverse changes in a company’s revenue elements due to unfavorable movements in the currency prices. For instance, the prices of caterpillar tractors were at one time high in the international market because the US$ gained more strength against other currencies. Other countries had to give up more of their currency in exchange for one dollar. This situation caused the tractors to be more expensive as compared to the competitor’s (Rheinla?

nder & Sexton, 2011). During the period, the caterpillar company recorded lower sales due to the influence of the currency price fluctuations. Lastly,

...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Currency Future Contracts Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
Currency Future Contracts Essay Example | Topics and Well Written Essays - 1000 words. Retrieved from https://studentshare.org/finance-accounting/1494686-currency-future-contracts
(Currency Future Contracts Essay Example | Topics and Well Written Essays - 1000 Words)
Currency Future Contracts Essay Example | Topics and Well Written Essays - 1000 Words. https://studentshare.org/finance-accounting/1494686-currency-future-contracts.
“Currency Future Contracts Essay Example | Topics and Well Written Essays - 1000 Words”, n.d. https://studentshare.org/finance-accounting/1494686-currency-future-contracts.
  • Cited: 0 times

CHECK THESE SAMPLES OF Currency Future Contracts

How Forward Contracts and Currency Futures could be Used by TIR Plc

Thus many business corporations and banks have been using forward contracts to ignoring future uncertainty about prices.... But nonetheless, speculators depend on forwarding contracts to bet on price changes of the underlying asset.... The author of the paper states that forward contracts have differed from other currency deals with reference to the size, time period and settlement procedures.... nbsp; Essentially forward contracts are executed over-the-counter (OTC) basically because those contracts are more conveniently executed through telephone and online trading activities worldwide without any trading place or transactions....
8 Pages (2000 words) Assignment

International Business Finance at Vodafone Plc

Hedging implies replacement of an unlock future exchange risk with a presently known exchange rate where alternatives such as Forward/future Market Hedge, Money Market Hedge, Risk-shifting (price all products in home currency), Pricing Decisions, or Currency Risk Sharing can be used.... nbsp; The different structures of currency (fixed, pegged, etc.... There are 4 factors that influence the fluctuation of forex rates:It is defined as the elasticity of the real domestic currency value of Assets and Liabilities, appearing in the financial statements to unanticipated changes in exchange rates....
8 Pages (2000 words) Term Paper

Derivatives Markets

Indeed, we have already covered forward and futures contracts on stock indices; options are no more difficult in structure.... Almost anything with a random outcome can have an option on it.... Note that by using the word anything, we are implying that the underlying does not even need to be an asset....
18 Pages (4500 words) Essay

Mathematics of Finance

This paper examines traditional approaches to financial appraisals emphasis given to the application of DCF methods to future cash flows.... DCF analysis, defined as the process of valuing capital budgeting projects by discounting their future expected cash flows.... DCF framework, defined as the valuing of an asset by discounting its expected future cash flows at some discount rate....
5 Pages (1250 words) Essay

Futures, Forwards and Options

This study “Futures, Forwards and Options” will focus on three derivatives only; futures, forwards, and options contracts and evaluate their roles in risk reduction, arbitrage purposes, and speculation.... Futures are also known as futures contracts in finance.... However, the delivery and payment day, which occurs on a future date is specified and fixed, and is referred to as the “delivery date” (Suitcliffe 2006, p.... In short, a futures market acts as an intermediary between the buyer and seller and sees to it that they come to an agreement regarding the exchange of commodities or financial instruments at a certain time with specific future delivery time (The Telegraph 2014)....
5 Pages (1250 words) Assignment

Taking Business Abroad

Thornton's, a premier chocolatier founded in the UK in 1911, is a High Street business operating solely in the United Kingdom with a single product in its portfolio: gourmet chocolates.... Today, Thornton's has annual sales revenues of £221 million which are provided by 350… Thornton's is a publicly traded company on the London Stock Exchange, with a current stock value of £99 per share (Bloomberg 2014)....
10 Pages (2500 words) Essay

Homework in Economic Processes

In speculating, the speculators who anticipate for appreciation of the currency will purchase the future contracts of the currency as opposed to those who anticipate the currency's decline who will sell Currency Future Contracts of that currencyQuestion 7When the US based firm wants to lock its maximum price to be paid for euros in future, then the US firm can consider purchasing a call option for euros.... Agency cost refers to the cost of conflict between the managers and… Managers may what to invest in future returns while shareholders what spending that will increase their share profit. b....
2 Pages (500 words) Assignment

Financial Strategy: Siyaya Ltd and Photo Limited

In case if Giza Limited is interested in hedging its upcoming receipts, it should buy the appropriate Currency Future Contracts against US$ and then sell those contracts after three months to close out its position.... They are traded on standardized term with specified number of contracts such that each contract has the same number of currency units.... three months and after which the contracts are “closed out”.... 5% inclusive of underwriting cost. Question 4 a) i) Forward Exchange Contract The forward rate is: $ Spot rate 1·5852 Premium (0·0072) –––––––– 1·5780 –––––––– The sterling amount is: $150,000,000/1·5780 = £95,057,034 ii) currency Options The results for each of the spot rates in six months time are as follows: (i) (ii) Exchange rate $1·65 $1·50 Exercise price $1·60 $1·60 Option Exercise Lapse £ £ £ sterling receipts $150,000,000/1·60 93,750,000 $150,000,000/1·50 100,000,000 Option premium [($150m/$100) x £1·10] (1,650,000) (1,650,000) ––––––––––– –––––––––––– 92,100,000 98,350,000 ––––––––––– –––––––––––– iii) To do nothing Sterling receipts for each of the spot rates in six months time are as follows: Spot rate $1·65 $1·50 £ £ $150,000,000/1·65 90,909,091 ––––––––––– $150,000,000/$1·50 100,000,000 –––––––––––– b) In case if spot rate is 1£ = $1....
4 Pages (1000 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us