Introduction to Finance

162
C H A PT E R 6 International Finance and Trade
Summary
(LO 6.8) 
International business transactions can take weeks, if not 
months, to close. Products must be shipped vast distances, possibly 
with several carriers. Delivered goods must be inspected and any 
damage or incorrect shipments settled. In sum, a transaction today 
may not result in a dollar cash fl ow stream until some future time.
To reduce the risk of exchange rate fl uctuations during this 
time, fi rms can enter into forward contracts with a bank to lock in 
a transaction today for a specifi c amount of currency at a specifi c 
date in the future. Firms will have greater certainty with respect to 
its cash receipts, or payments, in terms of its home currency once the 
exchange rate is negotiated in a forward contract.
We learned that forward rates can play a role with speculators. 
Those who invest in currencies can use forwards to speculate that 
their expectations of future spot rates are more accurate than the cur-
rent forward rate. Investors decide where to invest excess funds by 
considering both interest rates in diff erent countries but also forward 
exchange rates to lock in the future conversion of the foreign currency 
back into the home currency.
Any forward rate situation will require the answer to these four 
questions:
1.
Is the person entering into the forward contract wanting to buy or 
sell the foreign currency? 
2. 
How much does the person wish to buy or sell? 
3. 
What is the time frame?
4. 
What is the forward rate?
Review Questions 
1. 
What risks does a company face due to changing exchange rates?
2. 
What are the four requirements that need to be determined when 
entering into a forward contract?