Forward Contract

1650 WordsMar 15, 20137 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…show more content…
Secondly, currency forward contracts can be generated in required currency while using future has limited range of currencies, as US Dollar/Pound Sterling, US Dollar/Yen and US Dollar/Euro. This means forwards have more variation of currency rather than futures (ibid, P.621-P.622). Lastly, The amount of each future contract is fixed (ibid, P.622). For example, “US Dollar/Pound Sterling contracts are for £25,000 each” (ibid). Forward contracts are more suitable for global corporations. These three reasons cannot be overstated as there is no limitation in currency forward contracts. In other words, forward contracts are more flexible than counterparts. On the other hand, there is a significant issue that should be considered is cost of transaction. A forward fee, which is less than $500,000 per contract is likely to be more expensive than a futures contract. Therefore, some companies that have a large amount of sales prefer a future contract. This point is another circumstance to be considered (Lumby & Jones, 2003). In addition, a currency fluctuation can be preferable or unexpected. This means companies cannot change any fixed exchange rate even if an exchange rate is more favored.

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