Swot Analysis : Fx Derivatives Essay

890 Words Apr 28th, 2016 4 Pages
The company’s decision to use FX derivatives to manage the FX risks means that the company already entered into a transaction, or is likely to have a commitment in a foreign currency. Depends on the terms of the transaction the use of some FX derivatives will be more appropriate than the others. For example, if the UK-based company trades on credit, the agreed amount in USD that it supposed to receive is subject to uncertainty in home currency terms. In this case, the company can hedge FX risk exposure by entering into a short USD/long GBP position in forward or futures contracts. The main advantage of this hedging is that it reduces FX risks and provides certainty on the receipt of the future net income. In particular, hedging can add value if net income received in USD represents a greater proportion of total company’s revenue (Muff et al, 2008). Conversely, if the company expected to meet its future liabilities in the US currency to pay out to its suppliers, or finance investment project with high growth opportunities, a long USD/short GBP position in forward or futures contracts can help in budgeting the costs.

FX forward and futures contracts are trade agreements that enable two parties to lock in the price at the time of the transaction to exchange one currency for another at a specified future time. The agreement is a binding commitment for both counterparties, the terms of which, such as the amount of the transaction, the payment procedure, the settlement date, and…

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