2. The PZK Co will take out a forward exchange contract, the foreign exchange contract is define as an agreement of two sides to determine in a specified amount of currency exchange on a valid date. The advantages of PZK Co use forward contracts are that, the company can hedge their imports by locking the currency rate, to avoid the unfavourable exchange rate and fluctuations thus the company can make use of the forward contract to ensure the exchange rate is fixed at the deal day. Moreover, the diverse type of financial transaction can cater importer and exporter to fight for best benefits, as the cost of the order is fixed by the specify currency rate, the company can calculate and prepare the budget and payment accurately.
However, the forward contract was restricted by terms and become the liability of company, so the default risk is higher if the buyer did not pay the agreed price, also the physical condition of product price may change as the quality may different from several months ago. Moreover, the financial loss occurred when an order is cancelled due to surplus, the company need to bear a risk and prevailing sport exchange rate must be paid. The PZK Co use invoice as a substitute of hedging, to eliminate transaction risk and economic risk, this methods is favoured by the exporter’s market which ensure the stability and low transaction costs, when the company was facing the price sensitive demand, the invoicing can reduce the economic risk by pass the exchange rate risk to foreign customer. …show more content…
Besides, it is a cost effective and convenient way to make international transaction. However, if the currency appreciate, the company may facing the rise of the reduction of demand due to change in fluctuate exchange rate, if the exchange rate decrease the values of contract increases. 3. The forward contract is a custom made contract between two corporations, the future date, standard volume and specified amount of currency were set. As it is an over-the-counter instruments (OTC) that the contract was restricted between buyer and seller and unregulated by Stock Exchange, if the firms cannot guarantee and fulfil the contract, it may cause the higher degree of counterparty risk and default risk, however, the forward contracts was used to hedge the volatility inherent in the underlying asset as the buyer and seller can control the hedge currency and interest …show more content…
Besides, investor can reach a huge cost savings by its great leveraging power, because the options position can mimic a stock position identically. As options not only can reduce the risk by hedging, but also have higher potential returns. Regarding to the case, assume that a US corporation have $100,000 that need to pay in euros in six months, the option is purchased to mitigate uncertainty rate of risk and provide the right to US corporation give up $100,000 to obtain €85,000 in six months. Furthermore, options can create positions synthetics, thus it is a flexible method to attain the investment in multiple ways.
The reason of not use forward contract is that, it is not an investment and only used to reduce risk between producers and consumers, thus it is not the attractive financial instruments to corporate money. The US corporation will loss the chance to gain windfall profit from movements in exchange rate. The disadvantage of forward contract is that it cannot guarantee if the outcome with hedging is worse than without hedging, where it is not occur while using
However, the forward contract was restricted by terms and become the liability of company, so the default risk is higher if the buyer did not pay the agreed price, also the physical condition of product price may change as the quality may different from several months ago. Moreover, the financial loss occurred when an order is cancelled due to surplus, the company need to bear a risk and prevailing sport exchange rate must be paid. The PZK Co use invoice as a substitute of hedging, to eliminate transaction risk and economic risk, this methods is favoured by the exporter’s market which ensure the stability and low transaction costs, when the company was facing the price sensitive demand, the invoicing can reduce the economic risk by pass the exchange rate risk to foreign customer. …show more content…
Besides, it is a cost effective and convenient way to make international transaction. However, if the currency appreciate, the company may facing the rise of the reduction of demand due to change in fluctuate exchange rate, if the exchange rate decrease the values of contract increases. 3. The forward contract is a custom made contract between two corporations, the future date, standard volume and specified amount of currency were set. As it is an over-the-counter instruments (OTC) that the contract was restricted between buyer and seller and unregulated by Stock Exchange, if the firms cannot guarantee and fulfil the contract, it may cause the higher degree of counterparty risk and default risk, however, the forward contracts was used to hedge the volatility inherent in the underlying asset as the buyer and seller can control the hedge currency and interest …show more content…
Besides, investor can reach a huge cost savings by its great leveraging power, because the options position can mimic a stock position identically. As options not only can reduce the risk by hedging, but also have higher potential returns. Regarding to the case, assume that a US corporation have $100,000 that need to pay in euros in six months, the option is purchased to mitigate uncertainty rate of risk and provide the right to US corporation give up $100,000 to obtain €85,000 in six months. Furthermore, options can create positions synthetics, thus it is a flexible method to attain the investment in multiple ways.
The reason of not use forward contract is that, it is not an investment and only used to reduce risk between producers and consumers, thus it is not the attractive financial instruments to corporate money. The US corporation will loss the chance to gain windfall profit from movements in exchange rate. The disadvantage of forward contract is that it cannot guarantee if the outcome with hedging is worse than without hedging, where it is not occur while using