If you were importing shoes from China and were going to owe the manufacturer 10,000,000 Yuan...

If you were importing shoes from China and were going to owe the manufacturer 10,000,000 Yuan in three months how could you use futures marketsto protect yourself from currency fluctuations that might hurt you financially?

Expert Solution

The importer should buy futures contract on Yuan so that if in future Yuan appreciates against your domestic currency then you can liquidate the future contact and pay to the Chinese exporter.

Future contract on currency give you an advantage to buy or sell the currencies based on your expectations and in future if any deficit occurring on account of adverse currency movement then future contracts can be sold for coping up the deficit.

Suppose your domestic currency is USD, so taking long position on Yuan would be appropriate because if Yuan appreciates then you have to spend more USD for buying Yuan OR You can also do a reverse transaction of selling USD against Yuan which will replicate buying Yuan against USD. If USD depreciates then you would ultimately gain on future contract. If you gain on future contract then you have to anyways pay that gains for your actual transaction or import.

Buying future contract on Yuan would protect you financially from any extreme currency movements. The appreciating Yuan would make you pay more USD and that financially impact the whole purpose of import hence, covering the deal with futures contract would mitigate such risks.

jeff jeffy answered 2 years ago

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