THE ROLE OF CURRENCY FUTURES IN RISK MANAGEMENT

Role of Currency Futures in Risk Management



EXECUTIVE SUMMARY

Specifically, the exchange rate risk is captured by movements in the exchange rate in the opposite direction of this scheme fluctuations between the exchange rates changes in the value of one currency in terms of another are variations in exchange rate affecting the total wealth of the traders who hold positions in foreign currency. The risk can define as the ability to incur losses because of the direct effects of exchange rate changes on expected cash flows. Exporter receives foreign currency for the goods sold, will lose from the depreciation of foreign currencies in relation to national, then as an importer, make payment in foreign currency, will lose from the appreciation of foreign currencies relative to the national. However, Hedging currency risk can be done by entering into fixed-term foreign exchange transactions. This measure is carrying out in order to avoid price fluctuations.

Role of Currency Futures in Risk Management

Introduction

The approach of risk occurs in the shopping emporiums and sailors of Italy in the late sixteenth century, are therefore, these merchants and traders would create the modern concept of risk and its importance in the insurance-based financial. In the process of development of industrial capitalism, which is from the nineteenth century, is when they appear greater risks because of inventions and their implementation: Railways, manufacturing activities, public works, automotive, etc., Revolutionizing life daily.

Literature Review

Credit risk can be managed using credit derivatives or by the process of securitization. Risk of loss is due to movements in exchange rates. It stems from ignorance of the price of one currency for a transaction. These changes give rise to some risk factor that increases according to the volatility that is in the price of these coins.

The international monetary system is a system of floating exchange rates: The exchange rates vary them permanently in the foreign exchange market. This situation creates a risk.

Currency risk occurs at two levels:

On the one hand, according to the motto chosen for the export contract, the company may lose money or experience a decline in its profit margin,

On the other hand, because of international competition, the price of the product or service offered to a foreign buyer may become less competitive if the currency of a potential supplier exporter in another country than France devalues compared to the euro.

Currency risk exists if the currency selected for the settlement of exports is not the euro. For countries that are in the euro area, the problem does not arise.

Recall that several member countries of the European Union are not part of the euro area such as the United Kingdom and Poland (Linda, 2008, 96-120).

The choice of invoicing currency accordingly plays an important role. If your company chooses to be settled in U.S. dollars for example, the exchange rate at settlement will be different in the exchange rate at the time of billing. Your company runs the risk that the currency ...