- 14 Marks
FM – L2 – Q87 – Foreign exchange risk and currency risk management
Explain four differences between forward and futures contracts for AB Enterprises.
Question
AB Enterprises, a company whose domestic currency is the cedi, has imported a consignment of tomato paste from Spain at a cost of EUR540,000, which is payable in three months’ time. Ama Kofi, the company’s finance director, is concerned about the company’s exposure to currency risk, and she is considering the use of forward contracts or currency futures to hedge the risk.
Required:
(i) Explain to Ama Kofi FOUR differences between a forward contract and a futures contract.
(ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AB Enterprises facing in relation to the EUR540,000 tomato paste consignment?
(iii) Explain to Ama Kofi, THREE disadvantages of hedging the euro exposure with futures hedge.
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