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Forward contract - minimize the exchange risk

Author

Listed:
  • Martin Maršík

    (University of South Bohemia in České Budějovice)

  • František Vebr

    (University of South Bohemia in České Budějovice)

Abstract

How can a Czech export (import) company hedge exchange risk? Some of the possibilities are these: 1/ use only CZK for foreign contracts; 2/ matching payments in the same or a parallel currency; 3/ use the products of the money markets; 4/ use the products of the forward market - FORWARD CONTRACT The forward market offers a forward contract to buy or sell a fixed amount of currency at a fixed price on a specific date in the future. The settlement of the contract is in more than two days. The export and import companies can then use the forward rate in this financial estimate (budged). The advantage of the forward contract for an exporter: The exporter is expecting cash flow (receipt) in DEM in 3 months that he wants to convert to CZK. The actual spot rate DEM/CZK is 19,00. The forward rate, which is due to be paid out in three months, is 19.617. The bank ensures to buy DEM from the exporter in three months aside from the spot rate in 3 months. The exporter use the forward contract for the hedging the risk of depreciation of the foreign currency against CZK.

Suggested Citation

  • Martin Maršík & František Vebr, 1998. "Forward contract - minimize the exchange risk," Acta Universitatis Bohemiae Meridionales, University of South Bohemia in Ceske Budejovice, vol. 1(2), pages 38-40.
    • Handle: RePEc:boh:actaub:v:1:y:1998:i:2:p:38-40
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