Why Companies Use Currency Derivatives?

In: Business and Management

Submitted By keykeykey
Words 2235
Pages 9
Essay topic: why companies use currency derivatives?
Currency derivative can be defined as a contract or financial agreement to exchange two currencies at a given rate or a contract whose value is derived from the rate of exchange of two currencies on spot (Shoup, 1998). Currency derivatives are developed and adopted to implement a strategy known as hedging, in which an organisation acquires a contract in order to offset an expected drop or rise in value of a position or future cash flow (Belk & Edelshain, 1997). This essay will outline the incentives and rationales behind an organisation that uses currency derivatives.
There are three types of currency derivatives used in hedging, future contracts, forward contracts and options, although swaps are also commonly considered as a currency derivative (Shoup, 2008). These instruments are derived from a spot rate, which is the price of the “underlying currency” (Eiteman, Stonehill & Moffett, 2009). Options are normally more costly than future contracts and forward contracts, because options are rights rather than obligations to buy or sell a currency (gives buyers the right not to exercise the contract if the spot rate movement is not favourable) (Belk & Edelshain, 1997). Research in New Zealand indicates that 70% of currency derivative users used forwards, which are most prevalent currency derivative instrument (Chan, Gan & McGraw, 2003). This is possibly because forwards are easy to manage and understand and can be used in frequent and uncertain transactions. Over-the-counter options are the second most popular instrument by NZ users of currency derivatives (40%), as options give users more flexibility (selling or buying a currency only when the firm can earn profit) (Chan et al, 2003).
There are basically two purposes currency derivatives serve when they are used. The first is to speculate on the favourable…...

Similar Documents

Proper Use of Company Email

...employees are in compliance with the proper use of company systems. The purpose of this “Security Requirement” is to describe the minimum required practices for employees, agents and contractors wishing to utilize electronic messaging that connect to the company’s IT Network. We seek to provide secure and stable electronic messaging systems that are responsive, and promote efficient communication. This security requirement policy strengthens our ability to comply with existing laws, regulations, and other policies (as applicable). The electronic messaging system is provided for official company business use. All messages sent and received are the property of the company. We reserve the right to view or search messages at our discretion. Our messaging systems may not be used to transmit messages or content that is harmful to the company, illegal, unethical, offensive, harassing, or fraudulent. Electronic Mail Requirements a) Forwarding, responding to, or any other ‘offensive’ types of electronic mail, such as hoax and chain letters, phishing scams, e-cards, or any other types of spam, is strictly prohibited. Retransmitting these types of messages can degrade the capabilities of our electronic mail systems and must be deleted upon receipt. b) Users authorized to use company electronic mail services do so with the understanding that all electronic mails created or stored on our computers or networks are the property of the company and are not considered private. c)......

Words: 312 - Pages: 2

Company Law - Derivative Actions

...are to manage company affairs, holding the board of directors meeting, and selecting the managing director or CEO to operate the company. Yet, in real world, the directors will abuse their power to exclude minority of directors, or make selfish decision with their own sakes of interests in the expense of company interests. For example, managing directors will maximize their director fees without the paying of dividends, or excluding the minority of directors by voting. Because of that, the legal system allows shareholders to take “derivative actions” to balance the power of directors. Derivative actions are the effective tools to solve this problem. However, it is not well proven in the real world. The purpose of protection and effect on company of derivative actions in practice will be discussed. Derivative Actions There are two types of derivative actions, common law derivative actions and statutory ones. For common law derivative action, it is taken based on case laws such as Foss and Harbottle case. In this case, two shareholders, Richard Foss and Edward Starkie Turton claimed the board of directors decided to misuse the land in Manchester of company which made company wasted many on the mortgage. Then, they sued the five directors because of their misbehavior, on behalf of company to claim the remedy. Finally, the case is dismissed. Thus, there are proper plaintiff rules and majority rules applied before common law derivative actions. In general, company affairs......

Words: 1000 - Pages: 4

Personal Use of Company Resources

...Personal Use of Company Resources Karen M. Boozer Baker College Center for Graduate Studies July 12, 2011 Abstract Everyone, at one time or another, has used company resources for personal usage. Considering all the time that people spend at a desk it is almost inevitable that this will happen. The important thing is to make sure that the usage is not abusive nor against company policy. Research suggests that people either very diligent about excessive usage or very abusive of company policies. The line between the two can be a very fine one but determining what constitutes excessive will always seem to be controversial. Personal Use of Company Resources Everyone at some point has used company resources for personal use whether it is office supplies, copiers/printers or computers. In today’s society people spend more time at work then they do at home with their families. There just does not seem to be enough time at home to handle all the things that need to be done at home and that is why employees use company resources for their personal business. How does an employer determine what is excessive and is considered abuse? There are some organizations out there that allow their employees limited use of company resources as long as it does not impact their jobs or the actual network resources. There are other companies out there that have very strict policies to prevent certain types of personal usage to the point that they do not allow any......

Words: 1144 - Pages: 5

Why Apple Is Such a Strong Company

...We are living in the Information Era, where any information that we desire is just a click away. Technology has changed and revolutionized every aspect of our lives, from communicating with our loved ones to staying updated with the most current news. With the introduction of the computer and the subsequent widespread use of the internet, the world as we knew changed. Apple was a pioneer every step of the way with the development of the computerized world, introducing graphic user interfaces as a product for mass consumption. Today, our world revolves around computers, as they organize and keep track of every aspect of our society. The introduction of the smartphone, which Apple also helped pioneer with its iPhone technology, allowed the everyday consumer to walk around connected to the internet. While the introduction of the laptop has made the personal computer much more portable, the computerized tablet is steadily gaining ground as a much more portable computer than the laptop. While for several years Windows attempted to produce a viable tablet to sell, it wasn't until 2010 that a mass market for the tablet was created with the introduction of the iPad. In 2010, the iPad took the world by storm, accounting for nearly 100% of the entire market for tablets. Every year the market grows, and Apple accounts for 32.4% of a far larger market today.. From 2012 the market has grown 60%, with the iPad firmly ahead of its closest competitor, Samsung, who controls only 18 % of the......

Words: 397 - Pages: 2

Why Companies Offshore Innovation

...Academy of International Business All rights reserved 0047-2506 www.jibs.net Why are companies offshoring innovation? The emerging global race for talent Arie Y Lewin1, Silvia Massini2 and Carine Peeters3 The Fuqua School of Business, Duke University, Durham, USA; 2Manchester Business School, University of Manchester, Manchester, UK; 3 Solvay Brussels School of Economics and Management, Brussels, Belgium Correspondence: AY Lewin, The Fuqua School of Business, Duke University, 1 Towerview Drive, Box 90120, Durham, NC 27708, USA. Tel: þ 1 919 660 7654; Fax: þ 1 919 660 7769 1 Abstract This paper empirically studies determinants of decision by companies to offshore innovation activities. It uses survey data from the international Offshoring Research Network project to estimate the impact of managerial intentionality, past experience, and environmental factors on the probability of offshoring innovation projects. The results show that the emerging shortage of highly skilled science and engineering talent in the US and, more generally, the need to access qualified personnel are important explanatory factors for offshoring innovation decisions. Moreover, contrary to drivers of many other functions, labor arbitrage is less important than other forms of cost savings. The paper concludes with a discussion of the changing dynamics underlying offshoring of innovation activities, suggesting that companies are entering a global race for talent. Journal of International Business......

Words: 17853 - Pages: 72


...Policies of Regulators Summary Solutions for End-of-Chapter Questions and Problems: Chapter Twenty Four 1. What are derivative contracts? What is the value of derivative contracts to the managers of FIs? Which type of derivative contracts had the highest volume among all U.S. banks as of September 2003? Derivatives are financial assets whose value is determined by the value of some underlying asset. As such, derivative contracts are instruments that provide the opportunity to take some action at a later date based on an agreement to do so at the current time. Although the contracts differ, the price, timing, and extent of the later actions usually are agreed upon at the time the contracts are arranged. Normally the contracts depend on the activity of some underlying asset. The contracts have value to the managers of FIs because of their aid in managing the various types of risk prevalent in the institutions. As of September 2003 the largest category of derivatives in use by commercial banks was swaps, which was followed by options, and then by futures and forwards. 2. What has been the regulatory result of some of the misuses by FIs of derivative products? In many cases the accounting requirements for the use of derivative contracts have been tightened. Specifically, FASB now requires that all derivatives be marked to market and that all gains and losses immediately be identified on financial statements. 3. What are some of the major......

Words: 7709 - Pages: 31

Why Develop and Use Theories

...Why Develop and Use Theories? First, theories tend to be more internally consistent than common sense. That is, a theory usually doesn’t contradict itself. Common sense, on the other hand, often contradicts itself. Second, theories tend to be more consistent with existing facts than common sense. Often, theories are constructed by collecting data. But even when facts do not play a dominant role in giving birth to a theory, facts will usually shape the theory’s development. So unlike common sense, theories do not ignore facts. Theories are a more educated guess and should have a greater chance of being correct than one based on common sense. Little agreement on team aims other than received from leader. Individual roles and responsibilities are unclear. Leader must be prepared to answer lots of questions about the team's purpose, objectives and external relationships. Processes are often ignored. Members test tolerance of system and leader. Decisions don't come easily within group. Team members vie for position as they attempt to establish themselves in relation to other team members and the leader, who might receive challenges from team members. Clarity of purpose increases but plenty of uncertainties persist. Cliques and factions form and there may be power struggles. The team needs to be focused on its goals to avoid becoming distracted by relationships and emotional issues. Compromises may be required to enable progress. Agreement and consensus largely forms among......

Words: 425 - Pages: 2

Why Not to Use Plastic Bags

...Why not to use Plastic bags As everyone knows the humble plastic bag has become an integral part of our lives. In fact the plastic bag has become so common that we hardly notice their presence. Yet if you look around you will notice that we are all in a swamp of plastic bags! They are everywhere. We use them to pack clothes, shoes, pens, tools, video games and even fruits and vegetables. At the super market they are soft yet strong packing medium. They are light weight, high strength and very flexible and come at a low cost. All of this might sound wonderful. But do you want to be a person who contributes to one of the latest and difficult of the environmental problems. The plastic bag is an agent of air pollution, cancer and skin disease. People who use these bags have made this an environmental menace which has made many of world's clean and glimmering metropolises a pile of garbage! Did you know they are a slow poison in our daily life? When you use plastic bag do you know how they are made? Many of the plastic bags at the super market are made through recycled plastic; this means the old plastic is burnt at high temperatures and melted down. For this process a large number of hazardous chemicals are used which makes them a severe health hazard. When you use a plastic bag you could be responsible for giving people who are close to you cancer, because when plastic bags and other plastic materials are burnt below 7,000 degrees they produce gasses which can lead to......

Words: 737 - Pages: 3

Currency Derivative

...Online available at www.indianresearchjournals.com INDIAN CURRENCY FUTURES: AN ANALYTICAL STUDY OF ITS PERFORMANCE DR. DEVAJIT MAHANTA* * Vice President-Benzcom Consulting Pvt. Ltd. 3A-Oberon Appartement, 6-Lamb Road Ambari, Guwahati-781001, Assam, India ABSTRACT Since its inspection in 2008, currency derivative trade in India had experienced explosive growth, both in volumes and value over the years across all the four currencies contracts that were in operation in INRUSD, INRGBP, INREUR and INRJPY. However in terms of the open interest currency derivatives trade in MCX is more as compared to the NSE. By consider both stock and commodity exchanges for launching currency futures contracts government of India has done a commendable job which is expected to increase the number of quality players, introduce healthy competition and boost trading volumes of Indian currency futures. The global markets (mainly USA) become active only after Indian markets close at 5.00 pm and as a result there is an evident fear about the risks associated with overnight fluctuations in the currency pair. Therefore the functioning as well as the profitability in Indian currency futures is effected by the current performance of the international currency futures market. It is imperative that any evaluation, projection on Indian currency futures market should be undertaken keeping the international market in perspective. KEYWORDS: Currency Futures, Open Interest, Contract Traded, Turnover......

Words: 2651 - Pages: 11

Why Establish an Acceptable Use Policy?

...| Why Establish an Acceptable Usage Policy?| | By| Stephen Lyons| | | | Background For the Past 15 years, I have been supporting small businesses with computer problems, ranging from desktop support to network and server integration. I have been a Microsoft® Certified Professional since 1999, and a Microsoft® Certified Small Business Specialist for over a year. I ran my own company, Lyons Den Computer Services, Inc., from 1992-2007. I exclusively serviced businesses with 3-25 workstation and servers. I recently started a new position where I am working with even larger organizations, with over 100 computers per location. One thing most of these companies have in common is a great dependence on technologies such as the internet, email and network connections to the world. Unfortunately, another thing they have in common is a lack of understanding of the depth of security concerns they create by taking advantage of these technologies. One of the largest security holes is often not a missing piece of hardware or software, but a missing piece of documentation that should be in place to protect their investment in all their equipment, personnel and good company name. I am referring to an Acceptable Use Policy for their network and Internet usage. Purpose I intend to show company management just how important this document can be, and why they need one, as well as the importance of keeping it updated. I will show examples of problems a lack of policy can......

Words: 2455 - Pages: 10

Why Use a Realestate Agent

...nightmare. With the right Real Estate Agent it doesn’t have to be a stressful event in your life. Licensed Real Estate Agents are in the business of buying and selling of homes, they are there to help with the mountains of paperwork, the dozens of phone calls to make sure the deal progresses smoothly from start to finish. It is not unheard of to work with an agent for months before finding your dream home. Using a licensed Real Estate Agent is a good idea when looking to purchase a home because they have the education to take you through the complicated process, and have knowledge of the current market they are well trained in negotiating. A real Estate agent is not required to purchase a home but in most cases it is recommended that you use one. All licensed Real Estate Agents have had to go through an extensive educational program before they are able to sit for the test. They have taken classes and studied the laws for the state they work in. They are also required to take continuing classes to ensure they keep up on the ever changing laws and procedures. The amount of paperwork is tremendous and with each and every page there are very important items that need to be addresses. There are on average 17 pages to a basic Purchase and Sale Contract in the state of Washington, Missing just one important paragraph can hold up a deal for weeks. Once they have their license and have an agency to work with they will may have the opportunity to take classes that teach......

Words: 694 - Pages: 3

Case Study on Pepsico’s Use of Financial Derivatives

...Case Study on PepsiCo’s Use of Financial Derivatives 1. Introduction 1.1 PepsiCo’s History The Pepsi-Cola Company was incorporated in 1919 by Caleb Bradham, the inventor of the Pepsi-Cola soft drink. PepsiCo became a multinational beverage and snack food company in 1965 when Pepsi-Cola merged with Frito-Lay. Since the 1965 merger PepsiCo has expanded its operations by acquiring Quaker-Oats, Tropicana, and Gatorade brands. With sales of $66.86 billion in 2014 and with products sold in over 200 countries, PepsiCo is one of the leading food and beverage companies in the world (PepsiCo, 2014). 1.2 PepsiCo’s Industry The beverage and snack food industries are both in the mature stage in their life cycles, and companies in these industries largely depend on product innovation, brand recognition, and low prices to remain competitive. Like all companies PepsiCo faces risk of increases in operating expenses and decreases in net income due to market risk. Companies in PepsiCo’s industry have been forced to expand its product offerings into healthy foods and drinks due to an insurgent health and wellness in American culture. 1.3 PepsiCo’s Competitors PepsiCo’s top competitors consist of The Coca-Cola Company, Dr Pepper Snapple Group, and Nestle; additionally, because PepsiCo is a multinational company it must also compete with countless local snack and beverage companies across the globe. Coca-Cola has been viewed as PepsiCo’s main rival for around 100 years, and the......

Words: 4581 - Pages: 19


...Derivatives Michael Bloss Associate Professor and Director MSc IF for Derivatives - Nürtingen-Geislingen University Introduction Michael Bloss Investment Advisor and Assistant Vice President Commerzbank AG Associate Professor and Director of the Master Programme "International Finance" Derivatives HfWU – Nürtingen-Geislingen University Director of the European Institute of Financial Engineering and Derivatives Michael Bloss contact information Michael.Bloss@HFWU.de Michael.Bloss@EIFD.de Michael Bloss Agenda for this course Derivatives exchanges Options Pricing Strategies Future Pricing Strategies Strategies and the pricing of options on futures Commodity and foreign exchanges futures Synthetic combinations and trading strategies Margining Risk controlling OTC derivatives SWAP OTC options Exotic options … Michael Bloss Derivatives to be in use in FE and portfolio management Case study … Literature list SET BOOKS: Derivatives by Bloss/Ernst/Häcker ISBN: 978-3-486-58632-9 Oldenbourg Verlag – München Michael Bloss Literature list Title Options, Futures & other Derivatives Derivate ISBN 978-0-131499-08-9 Author John C. Hull 978-3-486-58354-0 Michael Bloss, Dietmar Ernst Michael Bloss, Dietmar Ernst, Joachim Häcker Derivatives 978-3-486-58632-9 Michael Bloss cursive = English Version bold type = set book I have a request! Please tell me, if you don't understand me !!! Michael Bloss Lecture 1 Derivatives......

Words: 9291 - Pages: 38

Use of Derivatives in Risk Management

...Use of Derivatives in Risk Management Teresa Fritz Ashford University Managerial Financial BUS 650 Dr. Wendy Achilles April 2, 2012 Use of Derivatives in Risk Management Risk management is in a company’s wonders all the time, the managers need to watch closely at all times to stay on top to make sure they have time to react to a risk that may arise. By using derivatives management may be putting their company at risk and need to know the common risks that are involved and know how to avoid them. Ten of the failures are poor governance and tone at the top, reckless risk taking, inability to implement enterprise risk management, nonexistence, ineffective or inefficient risk assessment, falling prey to Herd Mentality, misunderstanding the mindset of “if you can’t measure it, you can’t manage it”, accepting a lack of transparency in high-risk areas, nit integrating risk management with strategy-setting and performance management, ignoring the dysfunctionalities and blind spots of the organizations culture, and not involving the board in a timely manner (Beaumier, DeLoach). The derivatives that are used for risk management are interest rate derivatives such as interest rate swaps, interest rate caps, basic swaps, and rate lock (Kelly). All companies should have a policy that states derivatives can only be used for risk management purposes and not for speculating interest rate movements (Kelly). Derivatives used for risk management can be a good thing and can also be a......

Words: 1733 - Pages: 7

Why Do Companies Use Derivatives

...Why do companies use derivatives? How can these be beneficial to a company? How can they hurt a company? Derivatives are used by a company to hedge risk. Risk can come in different flavors and so can derivatives. There are three main risks, which are hedged using derivatives. The first is interest rate risk. Many seemingly good investments can suffer at the hands of the fluctuations in interest rates. There are a few ways to hedge interest rate risk, one being a long-term lock on the interest rate by purchasing a treasury future and another is to use an interest rate swap whereby the company literally swaps their payment obligations by “swapping” a variable rate payment for a fixed rate. A second risk is exchange rates. If a company bids on a contract to sell a product for a fixed price, 6 months in the future but be paid in a currency different from their own, they run the risk of the exchange rate between the two currencies changing to their detriment resulting in the company receiving a relatively lower fee in their home currency. To hedge against this risk, companies can buy foreign exchange futures AGAINST the change in the exchange rate, which would positively affect the outcome for them and thereby providing them with insurance against the negative change. The third risk example is that of a commodity risk. Many products have dependent input commodities such as fuel, raw material etc. whose prices are critical in the company’s final profit. A company that......

Words: 567 - Pages: 3