Forward Contract
To what extent does a currency forward contract need to play a formal role in multinational companies?
A globalisation has risen over the last 20 years. Because of this factor, international markets have increased rapidly, therefore a large number of companies have been particularly interested in global operatings, such as, export trade, import trade, overseas sales (Moosa, 2003). A subsequent significant trouble looming large for multinational firms is a fluctuation of exchange rate because generally international transactions denominate in foreign currency. This state makes it clear that international organizations are confronted with profit or loss from unpredictable exchange rates whereas companies, which process transactions in their country, do not (Barumwete & Rao, 2008). This essay will examine how a currency forward contact is applied to reduce exchange rate risks in volatile value of currency situations plus how favorite currency forward contracts are, compared to futures contracts.
Risk can be defined as an unscheduled movement that generates unfavorable effects on value or profitability of corporations (Barumwete & Rao, 2008). In addition, an exchange rate can be described as value of a particular currency that can be converted to another currency (ibid). Therefore, Shapiro (2006) identifies a foreign exchange rate exposure as “a measure of the potential changes in a firm’s profitability, net cash flow, market value because of change in exchange rate. A tool that can eliminate or reduce unwanted section of risk can be defined as a derivative (Hillier, 2010)
As a global organization, it is well established that a considerable issue, which may occur after processing international business
A globalisation has risen over the last 20 years. Because of this factor, international markets have increased rapidly, therefore a large number of companies have been particularly interested in global operatings, such as, export trade, import trade, overseas sales (Moosa, 2003). A subsequent significant trouble looming large for multinational firms is a fluctuation of exchange rate because generally international transactions denominate in foreign currency. This state makes it clear that international organizations are confronted with profit or loss from unpredictable exchange rates whereas companies, which process transactions in their country, do not (Barumwete & Rao, 2008). This essay will examine how a currency forward contact is applied to reduce exchange rate risks in volatile value of currency situations plus how favorite currency forward contracts are, compared to futures contracts.
Risk can be defined as an unscheduled movement that generates unfavorable effects on value or profitability of corporations (Barumwete & Rao, 2008). In addition, an exchange rate can be described as value of a particular currency that can be converted to another currency (ibid). Therefore, Shapiro (2006) identifies a foreign exchange rate exposure as “a measure of the potential changes in a firm’s profitability, net cash flow, market value because of change in exchange rate. A tool that can eliminate or reduce unwanted section of risk can be defined as a derivative (Hillier, 2010)
As a global organization, it is well established that a considerable issue, which may occur after processing international business
References: Bank of England (2012). Statistical Interactive Database. London: Retrieved August 12,2012, from www.bankofengland.co.uk Belk, P Borumwete, L. A. and Rao, F. (2008) Exchange rate risk in Automobile Industry:- An Empirical Study on Swedish, French, and German Multinational companies. Sweden: Handellshogskolan UMEA University. Eiteman, D. et al. (2007) Multinational Business Finance. 9th ed. Boston: Pearson Education. Geczy, C. et al. (1997) Why Firms Use Currency Derivatives. The Journal of Finance, 52 (4), p.1323-1354. Hillier, D. et al. (2010) Corporate Finance. Bershine: McGraw-Hill Education. Lumby, S. and Jones, C. (2003) Corporate Finance theory and practice. 7th ed. Thomson, p.621-628. Moosa, I. A. (2003) International Financial Operations: Arbitrage, Hedging, Speculation. Financing and Investment, 3 p.67. Phillips, A. L. (1995) 1995 Derivatives Practices and Instrument Surveys. Financial Management, 24 (2), p.115-125. Shapiro, A. C. (2006) Multinational Financial Management. 8th ed. John Willy & Sons, Inc. Source: Adapted from Phillips, A. L. (1995). 1995 Derivatives Practices and Instrument Survey. London: Wiley-Blackwell. Retrieved December 30, 1994.