Futures Contract

A futures contract is a form of a derivative.  It is a contract to buy a specified asset at a specified price at a specified future date. It is a tool to manage financial risk. 

Here’s how it works. Suppose a company has an obligation to pay a debt of US$1 million in 8 months time.  The company is based in Australia, and normally trades in its own local currency (AUD).  In order to protect itself from the uncertain currency fluctuation, it decides to purchase a futures contract to buy US$1 million in 8 months time from a bank at a guaranteed exchange rate of USD1 = AUD 1.7.  The contract specifies that the company will buy $1 million in 8 months,  at the pre-determined exchange rate.  By having this contract, the company does not have to worry about whether the US$ will fluctuate against its favour. It is guaranteed to be able to buy $1 million at the specified exchange rate.

If at the 8 month period, the exchange rate becomes USD 1.00 = AUD 2.00, the company is able to purchase the USD1 million at AUD1.7 million, very much in its favour.  The downside of course is that if at the 8-month period, the exchange rate has become USD1 = AUD1, then the company will be purchasing the USD1 million at an unfavourable, though surprise-free, rate.

Risk Roadshow

Interesting concept of a risk road show to introduce young children to the mathematics of probability: Risk Roadshow.

Some Notes on Consulting and Consultants

Some notes I jotted down while browsing a consulting text by Fiona Czerniawska.  Some of the thoughts are hers, some are mine. Useful considerations for risk consultants:

• Consulting is about knowledge transfer from consultant to client.
• When deciding which consultant to hire, companies look for enormous depth of knowledge in the areas their company is interested in.  General knowledge does not cut it.
• Of all consultancies, process oriented ones are where executives are least impressed because the client and consultant level of expertise is not much different, and ‘consulting’ work is mostly facilitation.
• Some (not all) consulting engagements are about solving a problem.
• Some types of consulting services:
  • delivering a specific service
  • implementing a particular system
  • creating a successful solution
• Firms hire consultants because they need the input but don’t want to replicate the skill.  They don’t need the skill in-house on a permanent basis.
• Consultants provide new energy and momentum.
• Consultants are hired as a source of best practice information not available in-house.
• Consultants are also hired to provide championing of a sponsor’s project internally, something that sometimes is not possible from someone internal. 
• The depth of knowledge required from a consultant is specialist knowledge.