Forward Contracts

Forward exchange contracts (discussed in the previous chapter) are widely used by business firms to hedge against  volatile adverse exchange rates, Business firms enter in Lo a forward contract (with authorized dealers of the forward exchange  market, notionally banks) to buy or sell foreign  currency in exchange for Horne currency, normally at a specifics future date, at a  redetermined exchange conversion rate (known as forward rate) Indian’ importer, who wishes to avoid  foreign exchange risk,  as to purchase the required foreign currency (say US $ British i.) forward (for a period, say 90 days. when the payments are to be  ad Likewise, an Indian exporter’ to US  can enter into a forward exchange contract to sell us dollar to avoid the risk of  depreciation of the dollar when he receives payment on maturity (say, 90 days hence). Forward exchange contracts enable firms   o cover the foreign exchange risk. They are ideal,suited for hedging transaction exposure.  A typical forward contract specifies  he (I) .correct amount, (U) forward exchange rate, (W) parties to the contract. (Iv) the specified date of delivery, of foreign   u  involved in exchange and, (vi) terms and conditions for cancellation.

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