forward exchange market
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I need help on this assignment. I have to answers the following questions based on a chosen senario.
The selected scenario is : A manufacturing organization considering expansion to India or Brazil
1. What are implications of the absence or presence of a forward exchange market?
2. Does interest rate parity hold? What is its significance?
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Solution Summary
What are implications of the absence or presence of a forward exchange market?
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1) The major implication of absence of a forward exchange market is that companies looking to expand into India or Brazil will have less options to hedge their currency exposure. This will make the manufacturing operations riskier in the sense that currencies of both India and Brazil fluctuate quite a bit against US dollars and thus, use of hedging mechanisms such as forward or futures contract is a must for companies operating in either of these regions.
The presence of a forward exchange market will give additional hedging opportunities, apart from futures and options and swaps, to the companies operating manufacturing units in the region. Forward markets enable participants to hedge their currency receipts and payments at some future date, thereby allowing them to peacefully conduct their business and protect themselves from unfavorable currency rate movements.
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