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Finance 2 - Essay Example

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For this purpose, companies or investors are often involved in Future Contracts to “hedge” the risk associated with the investment and prices of commodities. It is worthwhile to mention the fact…
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Finance 2
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Download file to see previous pages sales and purchase agreements or decisions in the ‘futures market to develop a known price level’ and mainly ‘to offset the risk exposure and to limit themselves from any price fluctuations’. (investopedia.com)
Although the future and forward hedging through future and forward contracts respectively are almost similar in nature yet there is one main difference between the two. Forward Contracts are made for fairly large transactions whereas future contracts are reached for smaller amounts. The large organizations such as multinational or supranational companies, large financial or investor groups may involve themselves in forward contract hedge.
Monet market Hedge is an internal hedging technique which refers to “borrowing and lending transactions to eradicate currency risk by locking the particular variables related to foreign exchange and cash equivalents.” (Kofi Bofah)
Currency Option is another instrument utilized by investors or corporations to hedge against negative fluctuations, volatility or movements in foreign exchange rates. In simple words, I can say that Currency Option is an agreement through which the holder f currency has the ‘right to involve in buying or selling of currency at a specified time period.’
For instance, in our case, Hybat Corporation can hedge against foreign currency risk by purchasing a currency option put or call. If it believes that USD/HUF rate is going to fall from 250 to 200 meaning that it will become more expensive for US Hybat to convert its export revenues from HUF to Dollar and send it to its parent company so Hybat would want to buy a ‘put option’. Similarly, if the rate is going to increase from 181 to 200, then Hybat would want to buy a “call option on USD/HUF so that it could stand to gain from an increase in the exchange rate” (or the USD rise). (Investopedia.com)
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