How Forward Contracts and Currency Futures could be Used by TIR Plc Assignment

How Forward Contracts and Currency Futures could be Used by TIR Plc - Assignment Example The author of the paper states that forward contracts have differed from other currency deals with reference to the size, time period and settlement procedures.   Essentially forward contracts are executed over-the-counter (OTC) basically because those contracts are more conveniently executed through telephone and online trading activities worldwide without any trading place or transactions.  The asset in this instance is the currency of a country. In the same manner currency futures involve agreements by two parties to deliver and accept a financial asset on a future specified date. The difference between the two is based on the fact that Forward contracts are traded over the counter, i.e. they are fixed contracts which are not subject to any exchange. On the other hand currency futures are subject to exchange trading. Therefore they are standardized and need to be carried out through a party that would accept the exchange. Currency futures thus involve a margin while forward co ntracts have no such margins. Since currency futures are based on an exchange the degree of risk is mitigated while forward contracts carry a greater degree of risk.  For example, if the interest rate in the United States is 7%, then the future value of a dollar in 1 year would be $1.07. Thus Futures are highly standardized, being exchange-traded, whereas forwards can be unique, being over-the-counter. Therefore in the case of physical delivery by the subsidiaries of the TIR Plc, the forward contract specifies to whom to make the delivery. The counterparty for delivery on a futures contract is chosen by the clearinghouse. The parent company in the UK is expecting $1.4 million by 1st of December, i.e. after three months from its US subsidiary. Thus according to the interest rate futures, the sum of US dollars received by the parent company would be  $1.4m X 1.6280 = $2.2792 because at the end of the three month period the US dollar would be worth 1.6280.