Suppose AnyTime, a hypothetical retailer, signs a contract with a Swiss manufacturer to buy 10,
Swatch watches to be delivered in three months. The stipulated price is 75 Swiss francs per wat
which in dollars is $50 per watch at the present exchange rate of, say, $1 = 1.5 francs. AnyTime
bill for the 10,000 watches will be $500,000 (= 750,000 francs).
But if the Swiss franc were to appreciate, say, to $1 = 1 franc, the dollar price per watch would ri
from $50 to $75 and AnyTime would owe $750,000 for the watches (= 750,000 francs). AnyTime
reduce the risk of such an unfavorable exchange-rate fluctuation by hedging in the futures mark
Hedging is an action by a buyer or a seller to protect against a change in future prices. The futur
market is a market in which currencies are bought and sold at prices fixed now, for delivery at a
specified date in the future.
Anytime can purchase the needed 750,000 francs at the current $1 = 1.5 francs exchange rate,
with delivery in three months when the Swiss watches are delivered. And here is where specula
come in. For a price determined in the futures market, they agree to deliver the 750,000 francs t
AnyTime in three months at the $1 = 1.5 francs exchange rate, regardless of the exchange rate
The speculators need not own francs when the agreement is made. If the Swiss franc depreciate
say, $1 = 2 francs in this period, the speculators profit. They can buy the 750,000 francs stipulat
the contract for $375,000, pocketing the difference between that amount and the $500,000 Any
has agreed to pay for the 750,000 francs. If the Swiss franc appreciates, the speculators, but no
AnyTime, suffer a loss.
The amount AnyTime must pay for this “exchange-rate insurance” will depend on how the marke