Sample Coursework Paper on Currency Exchange and Contracts

Question One

For currency forward contracts, the parties in agreement (buyer and seller) are obliged to transact the agreed business, such as the purchase or sale of a commodity at a price agreed at the time of the contract. For instance, if a company agrees to sell a commodity to another today, the agreed price of the commodity today will be used in the transaction in months or years to come. On the other hand, for the currency future contract, during a transaction, the parties in the agreement are forced to exchange a currency for another at a date specified in the future, and the price of the currency in the future must be that fixed on the date of purchase of the given commodity. For instance, if a company is to purchase a commodity from another on 25th December 2015, the price of the commodity will be that fixed on the 25th Dec, which is the date of purchase.

MNCs might capitalize on the instruments described above when entering into financial transactions among themselves, and since there are fluctuations in currency exchange rates, the instruments might help do away with the accompanying economic and transaction risks.

An entrepreneur speculating a transactional risk could use the call option to purchase a commodity from the seller at the price agreed for a certain period, and this is notwithstanding a currency appreciation or depreciation over the period. Once a buyer speculates a loss in future for a commodity purchased he can use the put option to sell the commodity to the seller at the price agreed at the time of purchase. In this case, the seller will be obligated to buy the commodity.

Question Two- Response

Derivatives on currencies imply that in case of a payoff among different companies, the currency exchange rates at the time of the payoff dictate how the transaction among the companies involved will take place. Thus, this is arguably the best solution for transaction, translation, and economic risks faced by companies that operate internationally. For instance, an appreciation or depreciation of currency will not in any way dictate the terms of an agreement among companies.