Futures contracts are simple derivative instruments used for hedging purposes that is to counter financial risk. This study examines the role played by these instruments for managing risks in the global business world whilst highlighting the merits and demerits of their applications relative to other plain vanilla products (i.e. forwards, swaps and options). Further, this report presents the details on the structure/typical specifications and pricing of currency futures (CFs) contracts as well as the key differences inherent between the futures and other derivative products.
In the literature review, the study seeks to answer the question on why firms need to use currency futures to hedge against FX risk, and provide a justification on the usefulness of currency futures in predicting the spot rate changes and currency futures returns. Finally, the study uses two hypothetical cases to demonstrate how CFs can effectively be used to hedge against FX risk.
Inhaltsverzeichnis (Table of Contents)
- Executive Summary
- Introduction
- Literature Review
- Why hedge using currency futures
- Contract specifications and trading mechanisms
- Pricing and usefulness of currency futures in predicting the spot rate changes and currency futures returns
- Applications of Currency Futures
- Currency futures using Hypothetical Cases
- Hedging FX risk where the hedger holds the contract until maturity-Importer perspective
- Hedging FX risk where the hedger closes out the contracts before maturity-Exporter perspective
- Conclusion
- References
- Appendices
- Appendix I: Formulas and Footnotes
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This study investigates the role of currency futures in managing risks within the global business environment. It specifically focuses on the advantages and disadvantages of currency futures compared to other derivative products like forwards, swaps, and options. The report delves into the structure, specifications, and pricing of currency futures contracts, highlighting key differences between futures and other derivatives.
- The significance of currency futures for hedging foreign exchange (FX) risk
- The effectiveness of currency futures in predicting spot rate changes and returns
- The structural differences between futures and other derivative products
- The practical applications of currency futures in managing FX risk
- The advantages and disadvantages of using currency futures for risk management
Zusammenfassung der Kapitel (Chapter Summaries)
The introduction provides a historical overview of risk management techniques, tracing the evolution of futures contracts from their early use in agricultural markets to their broader applications in financial markets. It defines currency futures as foreign currency derivatives with standardized features and explains the differences between futures and forwards. The chapter emphasizes the importance of futures in hedging foreign exchange risks, particularly transaction exposure.
The literature review examines the rationale behind using currency futures for hedging FX risk. It delves into the structure and trading mechanisms of futures contracts, emphasizing their standardized nature. The chapter explores the relationship between currency futures prices and spot rate changes, investigating the predictive power of futures contracts for market movements.
The "Applications of Currency Futures" section explores practical examples of using currency futures to manage FX risks. It presents two hypothetical cases: one focusing on an importer who hedges FX risk by holding a futures contract until maturity, and another highlighting an exporter who closes out their futures contracts before maturity.
Schlüsselwörter (Keywords)
Currency futures, derivative instruments, risk management, foreign exchange risk, transaction exposure, hedging, spot rate, futures contracts, forwards, swaps, options, pricing, market volatility, multinational corporations.
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- Richard Ondimu (Autor), 2017, Role of Currency Futures in Risk Management, Múnich, GRIN Verlag, https://www.grin.com/document/367826
