A forward contract is an agreement made between two parties where one agrees to buy and one agrees to sell at a predetermined price on a date in future. It is said to be a flexible financial tool as it allows the buyer to customize the details and terms of the contract, such as the assets and amount to be traded as well as the date of delivery based on the buyers’ will. Some of the examples of the assets which could be traded with forward contract are commodities like oil, grain, natural gas and electricity as well as financial instruments and currencies of the foreign countries. This type of contract is traded over-the-counter and is majorly used to hedge against price risk, that is, the possibility of declination in the value of security in future. Since it is a customizable contract, it comes with a higher exposure of the risk of default and therefore, it may not be generally available to the individual investors. An illustration of forward contract could be made with the scenario between a wheat farmer and a beverage manufacturer. The wheat is expected to be harvested in six months’ time whereas the inventory of the beverage manufacturer has to be replenished after six months. As both sides of these parties would face price risk, that is, a decline in the spot prices of the wheat within the coming six months which would lead to a …show more content…
In other words, this means that a forward contract allowed the investors to decide on the assets and time to delivery of the transaction whereas alteration on these details cannot be done with a future contract. Moreover, a forward contract is said to be a private agreement as it is dealt directly between the buyer and the seller of the transaction. As for future contract, it is said to be a public contract as it is generally available and could be freely traded on the
• Jaguar Treasury should engage in Forward/Swap Contracts to Sell US$ and hedge against currency fluctuations.
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
In the other hand, there is a formal kind of contract, which means that it is the opposite of the simple contract. Which is there are 2 kinds. Written and oral. It is the same as simple contract but it has prove that both side of the parties has agrees on whatever that they have agreed on. Why a lot of people choose to do formal contract rather than simple contract? It will comes up to the consequences if they breach the contract. They know the consequences that they will get if they ignore or not following the contract agreement. When that happen and end up at the court, they will found guilty because there is a written proof or sound proof that they have agreed. And because of that proof, if one of the parties broke them, that party will get the same consequences that they have agreed on before in the contract.
Consideration must consist, in the end, the way to complete the consideration and promise need to be state when the contract happened, but
The goods must also be paid for by various methods of payment to facilitate international trade. This essay aims to analyse the possible claims from our advising buyer G arising from other parties to the contracts involved in this transaction. The essay will also analyse the legal relationships of all parties created that their respective rights and duties may have in the transaction. In doing so, it will discuss sale of contracts on c.i.f.
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
The exclusion clause is an important device for allocating the risks between the contractual parties. However, the exclusion clauses could mostly be found in written contracts, especially standard form of contracts. Standard form contracts with consumers are often contained in some printed ticket, or delivery note, or receipt, or similar document. In practice, it is very common that if a person wants the product, he may have no alternative but to accept the terms drawn up by the other party even though such terms are disadvantage to him, or he may simply accept it regardless the possible unfavorable position because he does not trouble to read a long list of terms and conditions. Therefore, contracts are regularly signed, tickets are simply accepted, or a tick-box on a website is clicked, commonly between large companies and individual consumers.
Since the rates are going to fluctuate, it is easy to imagine that the party, to whom the contract means a worse result than what the spot rate on the day of settlement will offer, will have a strong incentive to renege. Futures contracts solves this by use of two mechanisms, the first being that parties are required to post collateral, also called a margin, which serves as a guarantee that the parties can meet their obligations. The second mechanism is the daily settlement. Instead of waiting until the date of delivery, gains and losses are settled and exchanged every day through a process called ‘marking to market’ (Berk and DeMarzo, 2013). This means that cash changes hands every day, provided that the price of the contract
see, foreign exchange hedging was an area of key importance for AIFS given the level of currency
The forward contract is an agreement between two parties about trading an underlying asset for a specific price and quantity at a specific future date. The price of the forward contract does not change at the expiration date. For instance, individual A agrees to take a short position (sell) in trading 10000 Egyptian pounds on 31st of July 2009 at $0.5 per EGP to individual B who agrees to take a long position (buy). Both individuals with short and long positions are obligated to sell or buy the underlying asset with a forward price (Hull 2003: 4).
After the financial crisis of the late 1990s, the demands for risk management tools have increased. The investors have been effectively utilizing such products as KOSPI 200 futures and options, 3-Year KTB futures and USD futures to meet their hedging needs.
A contract is an agreement between two parties in which one party agrees to perform some actions in return of some consideration. These promises are legally binding. The contract can be for exchange of goods, services, property and so on. A contract can be oral as well as written and also it can be part oral and part written but it is useful to have written contract otherwise issues can be created in future. But both the written as well as oral contract is legally enforceable. Also if there is a breach of contract, there are certain remedies for that which are discussed later in the assignment. There are certain elements which need to be present in a contract. These elements are discussed in the detail in the assignment. (Clarke,
Figure 2.3 also shows that contractual system can be divided into service contract and production sharing contract (PSC). Nakhle (2008) states that concessionary and contractual systems represent the basic relationship pattern between governments and investors. Moreover, Mommer (2001) explains that concessionary system provide stronger position for investors, on the other hand contractual arrangement give bigger power for governments to control their resources exploitation and production. The next section will explain the general terms and explanation of concessionary and contractual system, including more detail explanation about Indonesia’s
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
In conclusion contracts are a valid offer and a valid proposal of two or more individuals that are of sound mind and have understood all the stipulations of the legal agreement, and have offer reasonable consideration to put forth said contract. Numerous things can occur to hinder the validity of a contract. Understanding the components of contracts validity, can alleviate legal consequence. Remedies are put forth to compensate contract that have been broke or breached. Although to put forth a suit is a legal right, parties involve in a valid contract can find considerable terms on their own without having to come to a legal litigation.