The XYZ Company is a US-based MNC & deals with various financial instruments as its core business activity. Among its various courses of action, the firm deals with financial derivatives (like forward, future, options, etc) & acts as a hedger, arbitrage, and speculator as well. To be competitive in the market, it has to observe and analyze different economic scenarios in different places/countries and formulate the strategy accordingly to nurture the available business opportunity.

 

With this reference, assuming your team is one of the core business teams of the XYZ Company & based on your understanding of the subject matter kindly respond & answer to the following different scenarios:

Scenario 1: How can currency futures be used by the XYZ Company as an arbitrageur & as a speculator?

Scenario 2: Forward versus Currency Option Contracts

1) What are the advantages and disadvantages to the XYZ Company if it uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros?

2) Explain why an MNC like the XYZ Company uses forward contracts to hedge committed transactions and use currency options to hedge contracts that are anticipated but not committed.

3) Why might forward contracts be advantageous for committed transactions, and currency options be advantageous for anticipated transactions?

Scenario 3: Speculating with Currency Futures.
Assume that a March futures contract on Mexican pesos was available in January for $.09 per unit. Also, assume that forward contracts were available for the same settlement date at a price of $.092 per peso.

1) How could the XYZ Company capitalize on this situation, assuming zero transaction costs?

2) How would such speculative activity affect the difference between the forward contract price and the futures price?