(b) Despite its disadvantages as compared to Forward Contracts as a Hedging instrument in International Transactions, why should firms use Futures Contracts in International Transactions ?

The Advantages of Future Contracts are: Hedging against Exchange Rate Risk: International transactions often involve dealing with multiple currencies. Exchange rate fluctuations can significantly impact the value of receivables and payables. Futures contracts allow firms to lock in exchange rates for future dates, thereby stabilizing their cash flows. Managing Commodity Price Risk: Firms dealing with international trade in commodities (like oil, metals, and agricultural products) face the risk of price fluctuations. Futures contracts enable firms to lock in prices for future purchases or sales of commodities, thus protecting them against adverse price movements. Interest Rate Risk Management: Firms with international financial transactions often face interest rate risk. Futures contracts on interest rates can be used to hedge against fluctuations, ensuring more predictable borrowing or investment costs. Speculation and Arbitrage Opportunities: While the primary use of futures contracts is for hedging, firms can also engage in speculative activities to profit from their expectations of future price movements. This can provide an additional revenue stream. Liquidity and Standardization: Futures contracts are traded on exchanges with high liquidity, making it easy for firms to enter and exit positions. Cost Efficiency: Compared to other financial instruments, futures contracts generally have lower transaction costs due to their standardized nature and the efficiency of the futures markets. Regulatory Oversight and Transparency: Futures contracts are traded on regulated exchanges, providing a level of transparency and security that reduces counterparty risk.