Forward contracts are usually offset by establishing

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and the original position is cancelled. Forward contracts are usually offset by establishing another forward contract position with terms as close as possible to those in the original contract. Unless the forward contract provides a method for cash settlement at delivery, this will potentially involve two deliveries having to be matched in the cash market on the delivery date . Forwards and futures contracts also differ in how changes in the value of the contract over time are handled. For futures, daily settlement, also known as marking to market, is required. In effect, a new futures contract is written at the start of every trading day with all gains or losses settled through a margin account at the end of trading for that day. This method of accounting requires the posting of a "good faith" initial margin deposit combined with an understanding that, if the value in the margin account falls below a maintenance margin amount, funds will be transferred into the account to prevent the
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contract from being closed out. On the other hand, settlement on forward contracts usually occurs by delivery of the commodity at the maturity of the contract . Hence, futures contracts have cash flow implications during the life of the contract while forwards usually do not . QUESTION 15: What is a black market? Under what conditions might on exist? A black market is a foreign-exchange market that lies outside the official market . A black market exists when people are willing to pay more for a currency than the official rate . As explained by John D. Daniels, Lee H. Radebough and Daniel P. Sullivan (International Business, environments and operations , Fourteenth Editions, Pearson), “black-market closely approximates a price based on supply and demand for a currency instead of a government-controlled price”. Black markets usually occur when a country does not allow its currency to regulate itself according to the market force . The more inflexible a country in respect of its exchange-rate arrangement the more likely it will “give birth” to a black market. There are many examples of black market transactions: China in 2009 : Hong-Kong dollars were bought at an incredibly high price on the black market by people who were afraid of the future value of the Chinese Yuan. Zimbabwe in 2007-2009 with met terrific financial problems. Hyper-inflation, cholera epidemic, political turmoil considerably affected the economy. In spite of an official exchange rate, people were trading currency on the black market. Venezuela with the drop of oil prices in 2008: state owned companies began selling dollars on the balk market.
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  • Fall '01
  • Mussot
  • International Trade, import substitution, John D. Daniels, Lee H. Radebough

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