Worse still, orders are booked in dollars, but to cover local production costs shipyards buy forward currency contracts, transforming their obligations into won.
So it might try to protect itself by locking in an exchange rate using forward currency contracts, perhaps.Derivatives are also commonly used by both financial and non-financial firms when they raise capital.
Christina Weisz, director of currency exchange company Currency Solutions, recommends taking out a future or forward currency contract to protect yourself against an appreciating euro while still being free to take advantage if the euro should weaken further, as looks more likely.
If dealers in a forward currency cannot offset contracts for sale with contracts for purchase and find an excess of customers wishing to sell, the excess supply causes immediate pressure on the spot market, since arbitrageurs and others who supplement the forward demand for the weak currency must cover their positions by selling an equivalent amount spot.
And some managers had already sold some holdings and currency contracts.
Mr. Talley also suggested that clients use foreign currency contracts to hedge against the dollar's volatility.
If your stake in one foreign currency is large enough (close to six figures), you could trade currency contracts on the Chicago Mercantile Exchange.
Exchanges handling currency contracts warn individuals that even the best traders see losses on 70% of their trades.
The chapter also illustrates concepts like synthetic, cash flows, forward contracts, currency forwards, synthetics and pricing, and uses many applications to explain these concepts.
Air Products, based in Allentown, Pa., said most of the costs it incurred in the BOC deal were related to the currency forward contracts it used to hedge its share of the purchase.
China's foreign-exchange regulator has allowed HSBC Holdings, Citigroup and 12 other lenders to trade currency forward contracts in the country's interbank market, as part of measures to liberalize yuan exchange rates.
