Question

Spot market, Forward Markets and Futures Markets are common foreign exchange rate market options for managing business risks associated with exchange rate fluctuation with international business partners. How do you decide which market option is best for your business?

Answer 1

I will be deciding upon the market option as follows-

A. Transparency is one of the major factor which will be deciding upon which Market option to choose and if I am looking for higher transparency then I will choose future market.

B. liquidity is another factor to consider when looking for the market option and if I am considering higher liquidity then I will look for future markets.

C. customisation of the contract and standardization of the contract is another factor which I will be looking and if I am looking for customised contract then I will select Forward Market and if I am looking for standardized contract and I will select future market

D. I will also consider the party specific risk because party specific risk will be higher in Forward Market

Hence, my preference will always lie towards future market because it is more transparent and liquid and standardized and it will have an exchange type determination criteria.