Question

Forward and Futures Contracts

How companies that choose to go international will need to use these types of instruments (futures contracts) to mitigate risks they will encounter in the international markets.

Answer 1

Futures contacts are standardized agreements to exchange a specified asset at a specified price at a specified date.

They are standardized in the sense that they are traded on exchanges with the dates, assets, and prices being standardized.

Multinational companies need to deal with currency risk. Currency risk is the risk of unfavorable movements in foreign exchange rates. MNCs can mitigate currency risk by using currency derivatives. Currency futures are one kind of currency derivatives than can be used to mitigate currency risk.

For example, a company that is to receive a payment in a foreign currency in the future can mitigate currency risk by locking in to an exchange rate at which the future receivable is converted into its own currency. This can be done by selling currency futures. A company that is to make a payment in a foreign currency in the future can mitigate currency risk by locking in to an exchange rate at which its currency is converted into the foreign currency. This can be done by buying currency futures