Question

Suppose that in country X, the culture is one that avoids risk and frowns on gambling. Suppose the country uses the dollar in its international transactions, and a firm in X buys a product from Europe of which it will take delivery in 60 days and for which it will have to pay 100,000 euros at that time. The firm does not know how many dollars will be needed in order to obtain those 100,000 euros 60 days from now. One way to know that would be to enter into a contract for the future delivery of that currency with a speculator who would guarantee the firm that it will be able to obtain those euros for a specific dollar value. The firm would thus avoid the risk of having to pay too much for those euros 60 days from now by transferring the risk at the present time to a speculator. The speculator takes the risk, because he or she is expecting that the actual costs of those euros (in terms of dollars) will be less 60 days from now than speculator promised to the firm. As a result, the speculator profits from the price differential. Some in country X view contracts for the future delivery of a currency (forward contracts) as risk avoidance, but others view it as gambling. What do you think?



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  • CreatedApril 25, 2014
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