The Financial Sector (Edexcel A Level Economics A)

Discuss whether providing substantial government financial support to banks is the best policy response during a financial crisis (15)

The UK economy since the financial crisis
Figure 1: Pound sterling to US$ exchange rate, 2016-17

Extract A

UK companies use forward currency market

The Norfolk-based picture frames maker Nielsen Bainbridge recently made forward contracts in the foreign exchange market to reduce the impact of currency fluctuations. The pound’s post-Brexit referendum depreciation has been a test of nerve for Nielsen Bainbridge and many other importers. At present the company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett, the Finance Director. Forward contracts enable institutions, businesses and individuals to lock in an exchange rate over a certain period of time regardless of how the rate moves during that time. Ms Burdett buys currency as soon as Nielsen Bainbridge confirms a large order as a way to fix costs. One third of UK business managers are considering shifting from EU to UK suppliers.

(Source: adapted from ’UK companies use pound strength to hedge forex risk’ by Roger Blitz, Markets, © FT.com, 16 May 2017. https://www.ft.com/content/d50ce580-3968-11e7-ac89-b01cc67cfeec)

With reference to Extract A, explain the role of forward markets in currencies (5)
 

Extract A

UK companies use forward currency market

The Norfolk-based picture frames maker Nielsen Bainbridge recently made forward contracts in the foreign exchange market to reduce the impact of currency fluctuations. The pound’s post-Brexit referendum depreciation has been a test of nerve for Nielsen Bainbridge and many other importers. At present the company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett, the Finance Director. Forward contracts enable institutions, businesses and individuals to lock in an exchange rate over a certain period of time regardless of how the rate moves during that time. Ms Burdett buys currency as soon as Nielsen Bainbridge confirms a large order as a way to fix costs. One third of UK business managers are considering shifting from EU to UK suppliers.

(Source: adapted from ’UK companies use pound strength to hedge forex risk’ by Roger Blitz, Markets, © FT.com, 16 May 2017. https://www.ft.com/content/d50ce580-3968-11e7-ac89-b01cc67cfeec)