2023-04-19 14:41:00
04:41 PM
Wednesday, April 19, 2023
I wrote – Shaima Hefzy:
Dollar futures contracts once morest the Egyptian pound exceeded 44 pounds per dollar, during this week’s trading, according to Bloomberg data reported by several media outlets.
Dollar futures contracts have become of interest lately although they are not directly linked to the price of the dollar in the market, so what are they and how do they work?
Forward contracts are derivative financial contracts, in which the parties commit to buying or selling an asset at a predetermined date and price in the future.
In these contracts, the parties agree on a price for the asset to be sold or purchased and a specific time for the execution of the transaction (deferred contract), and when the execution date comes, the buyer must buy the underlying asset or the seller must sell it at the specified price, regardless of the market price at that time .
Underlying assets include physical commodities and financial instruments (ie almost anything can be bought and sold: stocks, commodities, currencies).
Why do the prices of those contracts change?
Futures contracts are traded on an exchange known as the futures exchange.
Futures contracts can be used for hedging or commercial speculation, as the futures contract allows the investor to speculate on the price of a financial instrument or commodity, and setting a prior price for the commodity or currency allows hedging once morest any changes in the price movement of these commodities, which helps reduce potential losses.
This process takes place on the basis of offsetting the losses in the asset through futures contracts, where if you lose money on the underlying asset, the money you earn from the futures contracts can mitigate this loss.
If the price of the purchased asset is higher than the trader specified when creating the contract, then the buyer will receive a profit, that is, when the selling price is higher than the price of the asset at the time of expiration of the futures contract (deal execution).
The price of futures contracts varies according to the market condition.
What does the rise in the price of futures contracts linked to the pound mean?
The high price of non-deliverable futures contracts for the pound indicates the existence of risks related to the provision of currency, which usually appear in times of crises related to the abundance of foreign currencies, and usually the higher the risks, the higher the prices.
For example, if expectations indicate that it will be difficult to provide foreign currency during the next 12 months, the buyer of the forward contract bets that he will buy the dollar at 30 pounds at the present time, provided that it will rise at the end of the contract to 40 pounds per dollar, and this means that he made a profit.
But if the price of the contract in this case, at the end of the agreement, drops below 30 pounds to the dollar, the buyer will lose, and therefore speculation on currencies that are subject to fluctuations increases greatly because speculators see it as an opportunity to make profit, in the future.
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