When a known future cash outflow in a foreign currency is hedged by a company using a forward contract, there is no foreign exchange risk. When it is hedged using futures contracts, the marking-to-market process does leave the company exposed to some risk. Explain the nature of this risk. In particular, consider whether the company is better off using a futures contract or a forward contract when:

(a) The value of the foreign currency falls rapidly during the life of the contract.

(b) The value of the foreign currency rises rapidly during the life of the contract.

(c) The value of the foreign currency first rises and then falls back to its initial value.

(d) The value of the foreign currency first falls and then rises back to its initial value. Assume that the forward price equals the futures price.

AppendixLO1