Question

Explain how a textile manufacturer could benefit from the use of futures as part of its risk management strategy.

Answer 1

Textile manufacture can use future to hedge his cost of production or forex revenue

Say, the manufacturer estimates that the price of raw material cotton will appreciate after 3 month. So, his cost of production will increase i.e. low net profit. So, he can buy now at future market and sell at higher future price. The profit can be used to buy highly priced cotton at spot market.

If the manufacture is exporting his product and he is thinking the foreign currency may depreciate against domestic currency. Then he can sell foreign currency at future market to avoid forex loss. Similarly, if he is an importer then he can long on forex currency future to avoid the risk of domestic currency depreciation against foreign currency.