Hedging w Forward and Future Contracts

Question 1

What does Speculation mean?

Answer 1

• Taking on risk to make a profit

Question 2

What does Hedging mean?

Answer 2

• Minimising risk so investor is not heavily impacted by price movement

Question 3

When would we want to hedge?

Answer 3

• Instances where its more expensive to buy things in the future or we know a similar item will increase price in future

Question 4

Relationship b/w FOREX and Heding?

Answer 4

• If FOREX weakens:
  Buying –> Bad for us, since we pay more for a FOREX w a future contract
  Selling –> Good for us, since we get more AUD for what we intended it to be
• If FOREX strengthens:
  Buying –> Profitable for us since we get more FOREX
  Selling –> Not profitable for us since we get less AUD back