A German corporation finalizeda sale to a Thai client on April 15. The German co

Question

       A German corporation finalizeda sale to a Thai client on April 15. The German corporation willdeliver some gardening equipment on May 31 and will be paid 345million baht on June 30. The current spot exchange rate is 40baht/euro. The German corporation is worried about a depreciationof the baht in the coming two months and wishes to sell those bahtforward against euros.

1. Give some reasons why the German corporation should use forwardrather than futures currency contracts.
2. Exactly what contract should the German corporation arrangewith its bank?

1. Give some reasons why the German corporation should use forwardrather than futures currency contracts.
2. Exactly what contract should the German corporation arrangewith its bank?

Explanation / Answer

The German corporation should use forwards rather than futuresbecause futures are standardized contract of commodities that arecommonly traded on the market. The gardening equipment are mostlikely not standardized commodities; even if there were a marketfor it, the trading would likely be very illiquid andinconvenient. The German corporation should purchase a put on the baht, whichallows it to sell baht at the exchange rate of 40 baht/euro.Similarly, it can purchase a call on the euro, allowing it topurchase euros at the same spot exchange rate.

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