Question

1 .List and discuss forward contact method that employed by Sony company to manage their foreign currency transaction exposures.

List and describe a tool and method employed

(300 words )

2. Critically evaluate their effectiveness in managing currency exposures. You should quote relevant literature readings to support your agreement.

Critical evaluation of forward contact method (150 words )

Answer 1

Answer

Forward contract

forward contract is a private agreement between two parties giving the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time.

forward contract is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a hedging tool that does not involve any upfront payment. The other major benefit of a currency forward is that it can be tailored to a particular amount and delivery period, unlike standardized currency

foreign exchange transaction exposure  is an unavoidable risk of foreign investing, it can be mitigated considerably through hedging techniques. To eliminate foreign exchange risk, an investor would have to avoid investing in overseas assets .Sony comapny has employed currency option as forward contract method to mitigate foreign exchange risk.Currency options offer a feasible alternative to hedging exchange rate risk. Currency options give an investor or trader the right to buy or sell a specific currency in a specified amount on or before the expiration date at the strike price.currency option is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. For this right, a premium is paid to the seller, the amount of which varies depending on the number of contracts if the option is bought on an exchange, or on the nominal amount of the option if it is done on the over-the-counter market. Currency options are one of the most common ways for corporations, individuals or financial institutions to hedge against adverse movements in exchange rate.

Critically evaluate their effectiveness in managing currency exposures. You should quote relevant literature readings to support your agreement.

Forward contract gives the business certainty over the exchange rate irrespective of the prevailing spot rate on maturity And helps a business protect its profit margins from foreign currency market downside.

Critical evaluation of forward contact method (150 words )

The technique for determining a currency forward rate is straightforward, and depends on interest rate differentials for the currency pair (assuming both currencies are freely traded on the forex market). For example, assume a current spot rate for the Canadian dollar of US$1 = C$2.0500, a one-year interest rate for Canadian dollars of 3 percent, and one-year interest rate for US dollars of 1.5 percent.

After one year, based on interest rate parity, US$1 plus interest at 1.5 percent would be equivalent to C$1.0500 plus interest at 3 percent, meaning:

• $1 (1 + 0.015) = C$1.0500 x (1 + 0.03)
• US$1.015 = C$1.0815, or US$1 = C$1.0655