exaplain how the following assist in hedging when the currency
forwards
Futures
Turnkey
Lumpsome contract
Options
Insurance
Forward contracts-
Currency forward contracts, are an agreement to exchange certain amounts of dollars for foreign currency on some future date. These forward contracts help business to lock in export sale or an import purchase at the current exchange rate, guaranteeing business transaction at the agreed upon price.
Let’s take an example, if Mr. A is an importer of electronic goods and if the INR appreciates against US$ afterwards, then Mr. A can’t make profit from it; he is locked into an exchange rate. But Mr. A has protected his business from the risk of a weakening of INR against US$.
Futures Contract-
Futures Contract are a commitment to purchase currency in the future at a today’s agreed upon rate based on current exchange rates. Futures contracts currency can be purchased from an exchange market such as MCX or NSE. Futures contracts have one important advantage over forward contracts: There is a secondary market for futures contract, which allows and option to sell futures contract before the tenure (say, for cash requirement for business needs).
It usually allow a range of final exchange prices rather than a fixed point, thus it may not offer the exact exchange rate which the investor want when the contract is at its maturity date. Further, the futures contracts are only offered in fixed amounts, which may make it hard to hedge the exact amount that the investor want through futures.
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