The Use of Futures and Forward in Risk Reduction，Speculation and Arbitrage

全路思

The fluctuation of exchange rates in the foreign exchange market can result in massive gains and losses both to financial and non-financial entities with assets or/and liabilities which are sensitive to such fluctuations.To optimize on the possible opportunities which could result from such fluctuations while minimizing the associated risks，such derivatives as futures and forwards have been used in arbitrage，speculation and risks reduction.This paper seeks to explore these derivatives and their position in the current international business environment.

Each of the contracts has various strengths and weaknesses that make them preferable or un-preferable in risk reduction，speculation and arbitrage.Although a future contact can easily eliminate the risks associated with foreign exchange，it may be difficult to get a counterparty that would consent to fix a future rate for the particular amount and time period under consideration（Karathanassis and Sogiakas，2010）.Such shortcomings could have resulted in the development of future markets which serves to partly solve the challenges presented in forward market.Although the future contracts are largely similar to the forward contracts.Like forwards，the future contracts are also legal contracts，the obligation in the future contracts can be “removed” before the contract expires by making an opposite transaction（Balbás and Reichardt，2010）.Hedging with futures involves buying futures if he risks is associated with appreciation of value and selling futures is the risks have to do with depreciation of value.Features also have various standardized features which distinguished it from forward contracts（Wimschulte，2010）.By standardizing the maturity and the contract size，it is possible to match various needs hence making feature more liquid.Other standardized features of futures includes the number of contracts that can be sold or bought by a party（position limit），the expiry date，the maximum daily price movement（price limit），and the contract month（Karathanassis and Sogiakas，2010）.The standardization of features however results in hedging imperfections.By speculating，one enters into a transaction or investment that will increase or create risks，though with the expectation that there will be favourable change in future.According to Baran and ?ern?（2011），a possible way to speculate using futures transactions on an equity portfolio is to rely on stock index futures to establish the possible value of an equity at the speculated date.Whichever the derivative，arbitrageur may ensure arbitrage free pricing using the law of one-pricing，whereby the arbitrageur equalises assetsprices with identical cash flows then set assetsprices using known future cash flow.Any deviation from this equality has to be offset.For instance，if it is higher，the arbitrageur may buy the underlying and sell the futures with borrowings so that so that on the delivery dates，the arbitrageur will surrender the underlying and obtain the forward price.From the forward price，the arbitrageur will settle the amount previously borrowed and remain with the difference as the arbitrage profit.

In conclusion，futures and forwards have been employed in risk reduction，speculation and arbitrage in the international business market.Each of these derivatives has intrinsic strengths and weakness which make them more preferable in some circumstances compared to others.However，these derivatives contribute significantly to the economic growth by making international business more efficient.The contribution made by such derivatives should therefore be appreciated in the international business environment，and a supportive environment for the derivatives should be created in the international business environment.

參考文獻

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