Forward Contract Essay

1638 Words Mar 25th, 2013 7 Pages
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
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Currency Forward Contracts can be defined as an approval to trade a currency in these three fixed conditions namely, date, exchange rate and amount (Barumwete & Rao, 2008). A forward exchange rate is a rate that is decided in advance. “The amount of transaction, the transaction date, and the exchange rate are all determined in advance where the exchange rate is fixed on the date of the contract but the actual exchange takes place on a pre-determined date in the future” (Barumwete & Rao, 2008). This means currency rate risks can be mitigated as acceptable conditions in future.
According to Belk and Glaum (1990) , Rumby and Jones (2003) and Geczy et al (1997), currency forward contracts are the most preferred approach, applied to relieve an exchange rate risk . These following issues can be seen to explain why currency forward contacts are dramatically more preferable than futures (the difference between these two figures is approximately 45% (Phillips, 1995, P.119)). Firstly, forward contracts can be

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