Question

Question 1. Pls write advantages and disadvantages of Forward contract method related with Audi company . (150 words )

Question 2. Please write advantage and disadvantages of Swap contract method related with Toyota company .( 150 words )

Question 3. Please write advantage and disadvantages of options contract method related with Honda company .(150 words )

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Answer 1

Advantages and disadvantages of Forward contract method related with Audi company:

Here are the main advantages and disadvantages of forward contracts and currency options compared to currency forwards.
Currency futures and options are mainly a derivative product that large financial institutions use to either hedge exposure to financial investment exposure or speculate on FX price action.

If as an individual or company you want to hedge your currency exposure a more appropriate and much more accessible solution would be a currency forward.

However, it is important to consider all the options when dealing in currency risk management so here is a quick breakdown of the advantages and disadvantages of forward contracts and currency options:

Advantages of currency futures contracts:
Low margin
High liquidity
Costs are very low
Potential to profit without taking delivery
Disadvantages of currency futures contracts:
Mainly paper based
Set amounts traded in lots
Losses can exceed your account balance
restricted to professional traders
Some brokers do not allow delivery
Advantages of currency options:
They are very cheap to trade
They are available on or off exchange
Risk is limited to premium (if you are a buyer)
Very high potential returns versus risk
Lots of strategies to speculate on volatility and price movement
Disadvantages of currency options:
They can be illiquid
Quickly become worthless
Risk is potentially unlimited (if you are a seller)

Advantages and Disadvantages of Swap Contract Method related with Toyota company:

Advantages:
To start with, the most noticeable advantages for small companies of using financial derivatives are in the financial area. This includes predicting a future price trend, stabilizing costs and maximizing sales profits. When the company is concerned about the derivative market, the price of futures and options and commodity price derivatives can easily help it to predict the future price trend of its raw materials. Thus wise decisions on making instant large purchases or future purchases could be made. If the predictions prove correct, unnecessary expense on raw materials can be avoided. Another way small companies could take advantages is to stabilize their purchase costs. If the company enters into a commodity price forward contract, it could possibly stabilize its purchase costs. Since engaged in these derivative contracts, the company has accepted to buy a certain commodity at a special price, thus the purchase cost is fixed in contractual format. Or it could use foreign currency forwards and options to minimize the impact of exchange rate fluctuation in the same way. (Bodnar and Marston, 1988).[4] A third area a small company could benefit from utilizing financial derivates is to maximize its profits. A foreign currency forward or option contract with its distributors, the company is able to sell its products with fixed sales income in domestic currency. As a result, no more price or exchange rate fluctuation could influence the company’s sale revenue. There are three other advantages caused by derivative instruments. These are: increasing business reputation, expanding the company to enter the finance industry, and training the management team to handle more complex finance problems. There is a further explanation that derivative instruments can increase business reputation. When a company fulfills all the obligations and duties that the derivative contract included, distributors may think it a creditable partner and shareholders may give more credit to their invested entity as well. The second advantage is that a small company can gain opportunities to enter the high level of financial markets for its frequently participation in the derivative market. It is beneficial for the future development of the company. Through earning large quantities of short-term return, the firm’s volume could be increased and expansion into the financial markets could be realized (Gay and Nam, 1998).[5] Finally, the management team of a small enterprise could get plenty of experience in dealing with these advanced financial instruments. This could train them for better understanding of the whole economic trend, so they are better prepared for future financial work, benefiting the company in a fundamental way.

Disadvantages:
Aside from all the possible advantages financial derivatives can bring for small companies, there are also corresponding disadvantages. Just as proper managing can cut down on material costs and maximize sales figures and profits, if used inappropriately, derivative instruments may result in huge losses or even bankruptcy for small companies.

The most recognized disadvantage that financial derivatives could bring about is financial difficulty. In this situation, it is hard to professionally handle the derivatives instruments, the consequences would be terrible. One appropriate example to illustrate the huge financial losses caused by derivative use is that five to six small firms in India have engaged in a lawsuit with private-sector banks with some improper handling of the derivative product, causing ten million losses on derivative instruments.[6] In the second place, if the prediction is incorrect, a commodity price or foreign exchange future or forward contract will raise the purchase costs for small firms, for that this kind of derivatives sets the future amount due fixed whatever the future prices or exchange rate would be. In a similar situation, when arrangement is improper, interest rate derivatives will cause fund costs to rise. That is because the interest rate derivatives have set a limit to the funding costs. As a consequence, when the interest rate descends, funding costs are increased, leading to financial trouble for the small enterprise.

There have some other disadvantages come in other area except for finance. When company failure on derivative markets, shareholders, creditors and other relevant parties tend to be lose their confidence in the company’s performance, therefore, it will face a much worse financial position. Shareholders may start to sell their stocks, and creditors may ask for early repayment of credit. Under these circumstances, the reputation of company may be seriously damaged. Another drawback is the management team of the company may feel frustrated about their poor operation on derivative instruments, thus losing morale for attempting another innovative financial instrument, which could possibly put the enterprise into a more difficult situation.

The advantages and disadvantages of options related with Honda company:

Options are a very unique investment vehicle so it is important to learn the unique characteristics of options before you decide to trade them.

Advantages:
Leverage. Options allow you to employ considerable leverage. This is an advantage to disciplined traders who know how to use leverage.

Risk/reward ratio. Some strategies, like buying options, allows you to have unlimited upside with limited downside.

Unique Strategies. Options allow you to create unique strategies to take advantage of different characteristics of the market - like volatility and time decay.

Low capital requirements. Options allow you to take a position with very low capital requirements. Someone can do a lot in the options market with $1,000 but not so much with $1,000 in the stock market.

Disadvantages:
Lower liquidity. Many individual stock options don't have much volume at all. The fact that each optionable stock will have options trading at different strike prices and expirations means that the particular option you are trading will be very low volume unless it is one of the most popular stocks or stock indexes. This lower liquidity won't matter much to a small trader that is trading just 10 contracts though.

Higher spreads. Options tend to have higher spreads because of the lack of liquidity. This means it will cost you more in indirect costs when doing an option trade because you will be giving up the spread when you trade.

Higher commissions. Options trades will cost you more in commission per dollar invested. These commissions may be even higher for spreads where you have to pay commissions for both sides of the spread.

Complicated. Options are very complicated to beginners. Most beginners, and even some advanced investors, think they understand them when they don't.

Time Decay. When buying options you lose the time value of the options as you hold them. There are no exceptions to this rule. Options can be a pain when it is harder to get quotes or other standard analytical information like the implied volatility.

Options not available for all stocks. Although options are available on a good number of stocks, this still limits the number of possibilities available to you.