The company has different kinds of derivatives based on the information presented on the companys website. Forward contracts are the first type of derivative that the company has invested in this case. The company has agreed to get into forwarding contracts. According to Balta, 20115), the main aim of getting into the forward contracts is to secure the changes that may accrue negative outcomes. The decision to have the company stocks in future date as presented on the companys website depicts that the company is reducing or rather getting rid of risks that are associated with business activities. A third party cannot affect any change in the company as stipulated in its agreements.
The main benefit of forwarding contract kind of derivative is that there is the enjoyment of the prices that are set at the current date. Fluctuations in prices are borne by the other company. Based on the analysis, it has been determined that the company experiences some risks when engaging in the forward contract in this case. The first and foremost risk that the company experiences when in engaging in a forward contract is finding an interested party that is willing and able to buy the contract. This risk has however been mitigated by fore trading and online trading. The inflexibility of the agreement is the other risk that the company is facing. Any option to change the agreed terms and conditions may be the possible result to financial losses of the company. Therefore, credit risk of the company is also involved in the case. One of the primary reasons as to why the company seeks to get into a future contract is to ensure that the company gains from the current prices in a future date. Furthermore, it is also a source of credit to make the company operational.
Summary of the Futures Contract for TOYS R US Company, Benefits, Risks and Reasons for Entry
The company has also vested in future contracts that are close to kinds of derivatives to forward contracts. Analysis of TOYS R US dealing with forex indicates that there is a future contract in the sense that the company has an obligation to the sale of the agreed commodity at a future date in accordance with the agreement that the company takes at the moment. The future contracts of the company have been listed on the stock exchange thus enjoying intermediary trading through the stock market. The resultant impact is that the process evaluation is effectively done.
Furthermore, the date, the sizes of the contracts, prices, and expiration are also determined before time so that the chances of errors are less and have fewer risks. Moreover, the gains of the company are also settled daily thus reduces the chances of credit risks.
The entry of future contract is to foster diversification of risks as well as reducing possibilities of business failure and making trading in safe markets thus enjoying standard prices and regulations.
Summary of the Option Contracts for TOYS R US Company, Benefits, Risks and Reasons for Entry
Based on the financial information of the firm, the company has also vested in options contracts. It has limited control over the dealings of the contract once made, primarily because the other party makes the crucial decisions of the activities of the contract. The company can only make an option after the expiration of trading of the agreement. The option derivative enables the company to make a future choice. However, it cannot sell at a future date that is initially agreed upon.
The company enjoys wide choices by embracing option contract. This ensures that risks are reduced, and standards are also maintained. The risks that are involved include the lack of a binding obligation.
Balta, S. M. (2015). The interest rate, Equity, FX and Commodity-linked structured products: Overview and Performance (Master's thesis).
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