Economics · Financial Derivatives
An Indian firm plans to import specialized equipment from Germany with a contract value of 5 million Euros due in exactly six months. If the firm decides to hedge this currency risk using an exchange-traded Currency Future Contract on the National Stock Exchange (NSE) rather than a customized over-the-counter Forward Contract with their bank, which of the following describes a key operational disadvantage they would face?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The Future Contract cannot be closed out or squared off before the expiration date under any exchange regulation.
- 2The Future Contract is fully customizable, meaning the firm would have to spend significant time negotiating specific terms with a single broker.
- 3The Future Contract requires daily mark-to-market margin settlements, which could lead to unexpected short-term liquidity/cash outflows if the Euro depreciates during the contract period.✓
- 4The Future Contract is a private agreement, leading to higher counterparty default risk.
Correct answer
The Future Contract requires daily mark-to-market margin settlements, which could lead to unexpected short-term liquidity/cash outflows if the Euro depreciates during the contract period.
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