International Financial Management Assignment Example | Topics and Well Written Essays - 500 words

International Financial Management - Assignment Examplehedging is one feature of the forward market. MNCs. Hedging the amount that they be supposed to receive or pay in foreign capital will make the make out rate unimportant for them till their future payment. There is very little difference between the forward and future market. But the differences are very important. Unlike the forward market, which is characterized by individualize contracts with no initial payment necessary, future market have standardized contracts with at least marginal payment paid initially. This implies that the amount that is being transacted tramp be of any value. Future contracts specify the volume of a particular currency to be used for transaction at the specified date. Secondly, for forward contracts there is no organized exchange present in the future contracts as the contracting parties directly do the transactions. Thirdly, the contract size depends on the contracting parties in case of the f orward contracts. But, for the future contracts, contract size is standardized. Fourthly, future contracts are government- regulated and bears low risk while forward contracts are unregulated and are high-risk bearing as there are chances of default. (Madura 2009, pp. 108-110)Speculators purchase currency futures to capitalize their expectation about the ups and downs associated with respect to currency movement. Suppose a plunger expects appreciation of a particular currency in the future. They can then buy future contracts and hence lock the price of that currency for a precise settlement date. On this date they can buy their currency at a rate specified in the futures contract and sell it at the spot rate, which is less than the rate specified in the futures contract. Ifthe spot rate has appreciated, then they extract profit. Different expectations of the speculators guide their decisions to sell and purchase future contracts.Corporations use currency futures to hedge and thus r educe their