I don’t understand this Business question and need help to study.
Please responded to each student with 10 sentences
Student 1
Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?
Foreign ccurrency Forwards are more popular with businesses because they have less certain cash flows as compared to banks and individual so to proper hedge the risk they go for customized forward contracts , as this customization facility isn’t available in future contracts.
Futures contracts is a standardize financial contract between two parties in which one party agree to buy or sell the commodity at a specific price and at a specific future date and the other party agree to make sell or purchase. physical delivery does not occur. While, Forwards contracts is a type of financial contract between two parties in which one party agree to buy or sell the commodity at a specific price and at a specific future date and the other party agree to make sell or purchase physical delivery does occur. Foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses because of following reasons:
1. individuals and banks only trades in currency market, they do not need physical delivery while businesses need physical currency for making payment.
2. Futures contract is standardized contract, so risk is lower but forward contract is customized contract, so risk is high. individuals and banks does not want to take excess risk while businesses do.
3. futures contact is not available with all currency while since forward contact is customized so it can be created for any currency. Businesses require forward contact for all currencies.
Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange. Should Speculators use Currency Futures or Options?
The main difference is that option buyers are not obligated to actually purchase or sell the long currency – futures traders are. Option sellers may have to buy or sell the underlying asset if the trades go against them. Option buyers need not put up any margin and their potential loss is limited to the purchase cost, or premium, of the option. Option sellers and futures traders must put up margin and have virtually unlimited risk. Finally, the premium of an options contract is almost always lower than the required margin on a similar futures contract.
Futures contracts make more sense for day trading purposes. There’s usually less slippage than there can be with options, and they’re easier to get in and out of because they move more quickly. Trading options can be a more conservative approach, especially if you use option spread strategies. Bull call spreads and bear put spreads can increase the odds of success if you buy for a longer-term trade, and the first leg of the spread is already in the money.
Sources:
Moffett, M. H., Stonehill, A. I., Eiteman, D. K. (2018). Fundamentals of Multinational Finance. [6th Ed.]. Pearson Education. New York, NY.
Student 2
- Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?
There are several differences between foreign currency futures contracts and foreign currency forwards which is why individual investors prefer foreign currency futures contracts and businesses prefer foreign currency forwards. Futures contracts are a standardized financial contract between two parties in which one party agree to buy or sell the commodity at a specific price and at a specific future date and the other party agree to make sell or purchase. Whereas forwards contracts are a type of financial contract between two parties in which one party agree to buy or sell the commodity at a specific price and at a specific future date and the other party agree to make sell or purchase physical delivery does occur. Individual investors find futures contracts useful for speculation as they do not have access to forward contracts. Businesses on the other hand see futures contracts as inefficient and burdensome as the futures position is marked to market on a daily basis over the life of the contract. Because of the nature of these contracts, forwards are not readily available to retail investors. “The market for forward contracts is often hard to predict. That’s because the agreements and their details are generally kept between the buyer and seller, and are not made public.” (Phung, 2021) Overall, it is easier for the individual to utilize foreign currency futures to make speculative plays because they either don’t have or are very limited to foreign currency forwards.
References
Phung, A. (2021, June 30). Forward Contracts vs. Futures Contracts: What’s the Difference? Investopedia. https://www.investopedia.com/ask/answers/06/forwardsandfutures.asp.
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