Benefits and Drawbacks of Derivatives in Business

Running head: FINANCE PORTFOLIO MANAGEMENT
Finance Portfolio Management
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1FINANCE PORTFOLIO MANAGEMENT
Table of Contents
Answer to question 1.......................................................................................................................3
Answer to Question 3:.....................................................................................................................8
Answer to Question 4....................................................................................................................10
Answer to Question 5:...................................................................................................................13
References:....................................................................................................................................16

2FINANCE PORTFOLIO MANAGEMENT
Answer to question 1
UK currency market over view
Companies with having international presence into the global market, faces the issue of
currency volatility, as the currencies into different countries differs with the exchange rate. UK
currency market experiences a gain as the British pound gains on mounting possibility of a delay
in BREXIT deadline. In the recent times this has been recognized that the UK currency GBP per
USD, +0.7706% gains compared to the past sessions. This has been identically becoming among
the best performing major currency. The pound also strengthen against the euro as this shows
EURO per GBP is down by 1.3602% with the shared currency buying £0.8545, down 0.6%.The
recent analysis has shown that the movement of the pound has been subjected as the market was
focused on the BREXIT debate in the parliament. The movement has been recognised up to 4%
and this has been recognized as the biggest shift. However, the volatility has noticed in last
week while the pound dropped to as low as $1.3147. Further, the volatility recognized while in
recent times the pound fell almost 0.3% against the dollar to $1.32. However, on the very next
week this has shown a hike of 1.33% which is recorded as the highest level for nine months
(BBC News, 2019). Furthermore, identifying the positive impact of the BREXIT has helped to
forecast a development of GBP to EURO rate higher to the 1.16for the pair. The outlook from
the Bank of England, UK is highly dependent on the outcome of the Britain’s withdrawal from
the EU. This has led the bank to hold their expected interest rate at 0.75% which is widely
expected in UK (Pound Sterling Forecast, 2019).
Hedging to reduce the currency volatility

3FINANCE PORTFOLIO MANAGEMENT
Basically the hedging has been done to reduce the risk of exchange rate volatility. This
has been done to minimize the risk of losing the value of underlying assets. The hedging has
been done through generating a contract which reduces the future possibility of making loss from
exchange. The derivative instruments that are being used to hedge the exchange rate volatility,
has been done through the currency forward contract, currency future contract and currency
swap.
Currency forwards contract:
The currency forwarding is a binding contract. The risk from exchange rate volatility can
be hedged through making a future contract of currency rate. This has been done through locking
the rate of future purchase and sale of foreign exchange without charging any upfront payment.
This has been identified as a contact between two parties for exchanging currencies based on a
future fixed currency rate. This requires an understating of currency performance at the future
date. The settlement can be done through cash or delivery basis. This requires the understanding
and acceptability of both parties. This hedging process helps both the parties to set their risk at a
distinctive level where the price discrimination become disabled (Chung, Park and Shin 2014).
Currency future contact
Hedging through the currency future contract also helps in reducing the risk of exchange
rate volatility. However, unlike forward contract the future contract involves an upfront payment
in return of proving a protection of underlying assets or minimisation of risk. The underlying
assets are being hedged against a consideration. This has been done to reduce the risk from
currency movement through understanding the contract expiration date. The expiration date must
deliver the currency amount at a specified price on a specified date. The hedging has been done