Final answer:
Forward contracts and future contracts play crucial roles in international markets, managing risk and facilitating international trade. Kenyan financial firms have been successful in applying these contracts, with examples including Equity Bank and the Nairobi Securities Exchange.
Step-by-step explanation:
Role of Forward Contracts and Future Contracts in International Markets
Forward contracts and future contracts play crucial roles in international markets by providing a means for managing risk and facilitating international trade.
Forward contracts are agreements between two parties to buy or sell an asset at a specified price and date in the future. They allow businesses and individuals to lock in exchange rates for future transactions, protecting against currency fluctuations. For example, a U.S. company may enter into a forward contract to buy euros in six months at a predetermined exchange rate, eliminating the uncertainty of future exchange rate movements.
Future contracts are similar to forward contracts but are standardized and traded on organized exchanges. These contracts are used by investors and speculators to profit from price movements of commodities, currencies, or financial instruments. For instance, a trader might buy future contracts for crude oil with the expectation that prices will rise, allowing them to sell the contracts at a higher price in the future.
Success of Kenyan Financial Firms in Applying Forward and Future Contracts
Kenyan financial firms have been successful in applying forward and future contracts to manage currency and commodity price risks.
One practical example is Equity Bank, one of the largest banks in Kenya. Equity Bank offers forward contracts to its corporate clients that engage in international trade. These contracts help the clients hedge against currency fluctuations and secure future cash flows.
Another example is the Nairobi Securities Exchange, where future contracts for agricultural commodities like wheat and maize are traded. These contracts allow farmers, traders, and processors to mitigate price risks associated with agricultural produce.