Question

How would a firm use exchange rate futures to lock in current exchange rates?

Answer 1

For firms future changes in exchange rates can be dangerous. To counter it futures can be helpful. suppose firm thinks that euro has fallen and thus opts for futures. It hopes euro will rise further so it is better to go for futures to avoid loss. Note we are assuming that firm has to pay in euros after sometime. The contract fixes the exchange rate to be payable of the current time(futures) and thus there is no uncertainty. The appreciation of euro will not affect it. Of course depreciation will result in loss but that is tolerable.