Define a currency futures contract, Financial Management

Assignment Help:

Q. Define a currency futures contract?

A currency futures contract is a standardised contract for the buying or else selling of a specified quantity of currency. It is traded on a futures exchange as well as settlement takes place in three monthly cycles ending in March- June- September and December that is a company can buy or sell September futures December futures and so on. The value of a currency futures contract is the exchange rate for the currencies specified in the contract.

When a currency futures contract is bought or else sold the buyer or seller is required to deposit a sum of money with the exchange called initial margin. If losses are acquired as exchange rates as well as hence the prices of currency futures contracts change the buyer or seller may be called on to deposit additional funds (variation margin) with the exchange. Evenly profits are credited to the margin account on a daily basis as the contract is marked to market. Mainly currency futures contracts are closed out before their settlement dates by undertaking the opposite transaction to the initial futures transaction that is if buying currency futures was the initial transaction it is later closed out by selling currency futures. This method of reversing the position on futures before the settlement date is referred to as offset. If offset is used then physical delivery doesn't occur that is currency will not be physically bought or sold on the settlement date because the position has already been closed out. When a company requires physically buying or selling currency it will have to use the foreign exchange market rather than the futures market. But it must find that any loss on the foreign exchange market is balanced by a gain on the futures market (and vice versa).

Nedwen Co expects to obtain $300000 in 3 months' time and is concerned that sterling may appreciate (strengthen) against the dollar as this would result in a lower sterling receipt. The company must therefore set up a futures position designed to make a gain if sterling rises. The steps are as follow:

- On 1 May buy sterling futures contracts buying any kind of product produces a gain if its price rises whether a physical product or a derivative product. The company requires the hedge to be open until 1 August and therefore must use contracts with a settlement date on or later than this that is September contracts can be used. Enough contracts must be used to cover $300,000 of exposure.

- On August 1st the company will close out its position on futures by selling the same number as September futures contracts. If sterling has increase there will be gain on the contracts (bought low, sold high).

- On August 1st the company should also physically sell the $300000 receipt on the foreign exchange market. If sterling has risen that is become more expensive there will be a loss on this transaction.

- The gain on the futures market must balance (to some degree) the loss on the foreign exchange market. It isn't likely to be a perfect balance however as futures prices rarely move the same amount as prices in the foreign exchange market.


Related Discussions:- Define a currency futures contract

Accrual bond, It is a bond that does not give periodic interest payments. I...

It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some poin

Buying and selling securities, Buying and Selling Securities One of the k...

Buying and Selling Securities One of the key features that may occur while investing in financial markets is that sometimes investors overlook the essential factors they should c

What is over capitalization, Accounting and Financial Management 1. Wha...

Accounting and Financial Management 1. What is over capitalization? How do we know over capitalization has occurred? 2. Explain permanent and temporary working capital. 3

Define the term- profitability maximisation, Define the term- Profitability...

Define the term- Profitability maximisation Profitability maximisation would imply that a firm must be guided in financial decision making by one test; select projects, assets

Prices and yields, Prices and Yields The face value of the government s...

Prices and Yields The face value of the government security is Rs.100 or Rs.1,000. Earlier, that is, before 1950s the government bonds were issued at a discount. There was no f

What interest rate is required to yield a balance, You invest $1,000 at an ...

You invest $1,000 at an annual interest rate of 5% compounded continuously. How much is your balance after 8.5 years?  How long will it take you to accrue a balance of $4,000? What

Difference between transaction and translation risk, Question: You have...

Question: You have been appointed as the head of the treasury of Platza International, an automobile firm with many subsidiaries abroad. The management of Platza International

Explain the term- authorised and paid-up share capital, Explain the term- A...

Explain the term- Authorised and Paid-up Share Capital Number of shares of stock provided for in Articles of Association of a company is the authorized share capital. This figu

Operating cycle, how can an operating cycle be applied to a poultry busines...

how can an operating cycle be applied to a poultry business

Prepare a report for the managing director, The Managing Director of your f...

The Managing Director of your firm is thinking aloud about an appropriate gearing level for the company: "The consultants I spoke to yesterday explained that some academic th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd