Custom Term Papers: Hamlet’s Heroine, Ophelia -- GCSE English Literatu

Hamlet’s Heroine, Ophelia In Shakespeare’s tragedy Hamlet there is, technically, no heroine. But the female character who comes closest to qualifying for the role is not Gertrude, whose sinful past precludes this, but rather Ophelia, the â€Å"universal victim† of the drama. She is truly a good, upright person although she is victimized by her father, brother and boyfriend. Harry Levin, in the General Introduction to The Riverside Shakespeare, elaborates on the special kind of prose which the dramatist uses with Ophelia when she suffers her madness: Though there is no invariable rule, the comic scenes are frequently in prose, whereas the tragic scenes are usually in verse. Yet some of the most tragic, notably Ophelia’s made scenes and the sleep-walking scene of Lady Macbeth, are in that special kind of distracted prose which Shakespeare reserved for moments of mental distraction, when the fragments of suppressed emotion well up from the unconscious. (11) Shakespeare’s use of distinctive language is one consideration concerning Ophelia. Another is her victimization. Gunnar Boklund in â€Å"Hamlet† performs a partial-analysis on the character of Ophelia in Shakespeare’s tragedy, Hamlet: The only character who is presented almost entirely as a victim is Ophelia, a victim of the King’s fear and curiosity, her father’s servility and fundamental indifference to her, Hamlet’s misunderstanding of the situation and brutal treatment of her, and finally his fatal thrust through the arras in the closet scene. Her madness is, as I see it, a purely pathetic element in the play. In the world where Hamlet has been forced to act, there appears to be no room for passive and obedient innocence. It is crushed, and perishes. (123) The p... ...: Madness Her Only Safe Haven.† Readings on Hamlet. Ed. Don Nardo. San Diego: Greenhaven Press, 1999. Rpt. from â€Å"Hamlet†: A User’s Guide. New York: Limelight Editions, 1996. Pitt, Angela. â€Å"Women in Shakespeare’s Tragedies.† Readings on The Tragedies. Ed. Clarice Swisher. San Diego: Greenhaven Press, 1996. Excerpted from Shakespeare’s Women. N.p.: n.p., 1981. Shakespeare, William. The Tragedy of Hamlet, Prince of Denmark. Massachusetts Institute of Technology. 1995. http://www.chemicool.com/Shakespeare/hamlet/full.html Ward & Trent, et al. The Cambridge History of English and American Literature. New York: G.P. Putnam’s Sons, 1907–21; New York: Bartleby.com, 2000 http://www.bartleby.com/215/0816.html Wilkie, Brian and James Hurt. â€Å"Shakespeare.† Literature of the Western World. Ed. Brian Wilkie and James Hurt. New York: Macmillan Publishing Co., 1992.

Reebok Marketing Plan

Reebok Realflex| By The Breezers: Mannan Wu Abbey Barnes Chase Carraro Mohammed Baamer Deborah Dani Dylan By The Breezers: Mannan Wu Abbey Barnes Chase Carraro Mohammed Baamer Deborah Dani Dylan Final Marketing Plan| Professor Quinlan-Wilder November 16, 2011 Marketing 2800 Professor Quinlan-Wilder November 16, 2011 Marketing 2800 | | Executive Summary Reebok prides itself on creating products to enhance athletic ability. Upon formation of the company, Reebok has been dedicated to making athletes faster. Since then, Reebok has evolved into the world’s second largest maker of athletic apparel and is a leader in the shoe industry.Now Reebok will pave the way with its answer to the latest craze in fitness and in running. The Reebok Realflex will dominate the competition through altering some aspects of the marketing mix and introducing the Realflex shoe as a healthy shoe meant to better consumer fitness. Taking into consideration the SWOT analysis, which pinpoints Reeboks can imp rove and the things Reebok are already doing well, the target markets can be better identified and the marketing mix can be better modified. When looking at target markets, Reebok has narrowed its markets to college aged adults interested in maintaining fitness, and individuals between 40-65.To the younger target market, Reebok needs to convey enhancing the athletic performance. To the aging population, Reebok needs to establish that using their product will enhance health. By modifying its current marketing mix Reebok can meet the needs of consumers. Price will be at the median range of shoe costs as that makes the most sense for our target markets. Reebok wants to provide an affordable shoe that does not cost as much as other barefoot running shoes, but offers all the health benefits of natural running. However, too low of a price lowers the value of the product in the minds of buyers and will be detrimental to business.While price plays an important role in marketing the Reebok R ealflex, placement of the product will be where Reeboks competition is located. The shoes will be placed in major chains, like Dick’s Sporting Goods, Sports Authority, and Reebok stores themselves. In addition, Reebok will plan to give pairs of shoes to major gym chains, like 24 Hour Fitness, and let the trainers try the product as a way to recommend it to the desired target markets. When the shoes are in displays, the Realflex must be â€Å"front and center† to grab consumer attention from the moment they enter the store.Aside from price, promotion of the product will be one of the most vital keys to the Realflex success. Reebok will reposition themselves in the mind of their desired consumers. Though Reebok often uses testimonials and vibrant color to catch attention, the new promotional strategy will also focus on the concern that Reebok has for the health of consumers and for enhancing their performance. In many ways the new promotional strategy relies on correctin g previous errors of the company (Easytone) and in a discrete way build trust among consumers who use Reebok products and shape them into loyal repeat customers.The most important component of the marketing mix is the product. Reebok has created a product for the sheer purpose to better the health and improve the athletic ability of consumers. It is clear that Reebok believes in the product it has created. There is science to confirm the fact that natural running has numerous health benefits and does enhance athletic performance. Reebok has made a product where science meets style, and satisfies the needs of consumers. It is imperative that Reebok convey this genuine message to consumers.Doing so will build Reebok into a better business, increasing its market share, overall growth and profit. Table of Contents Introduction3 Situational Analysis4 The Company4 Current Marketing Mix4 Features and Benefits5 Current Product Life Cycle5 The Industry5 Environmental Forces7 Competition8 SWO T Analysis11 Critical Issues and Marketing Objectives13 Segmenting, Targeting, and Positioning14 Segmenting14 Targeting14 Positioning17 Positioning Statements18 MarketTrak Tool26 Conclusion28 Appendices29 Appendix A – Competition Table29 Appendix B – SWOT Analysis30 Appendix C – Positioning Map 1: College Students31Appendix D – Positioning Map 2: Baby Boomers32 Appendix E – RealFlex Packaging34 Appendix F – Magazine Advertisement35 Appendix G – Billboard Advertisement36 Appendix H – Pro-nation Advertisement37 Appendix I – Billboard Advertisement38 Appendix K – Glossary of Terms45 Bibliography46 Introduction The footwear industry is a competitive market. Two important components in this industry are the quality and marketing of the products. Reebok is a company with a long history in the footwear market and a marketing mix makeover for RealFlex could very well put the company back on top.By increasing the focus on the health benefits for older generations and aesthetically pleasing innovation for younger generations, Reebok will be able to cover wider demographics, thus increasing sales. This is a product which needs to be on the feet of consumers, because once that happens; the footwear will speak for itself. The remainder of this marketing plan is organized as follows: First, it will examine the company of Reebok and its background in the athletic shoe industry. Then, this plan will discuss Reebok’s major competitors and fully describe its SWOT analysis.Next, this plan will look at the first part of the proposed marketing strategy, to include the proposed ideas for segmenting, targeting, and positioning of the RealFlex shoes. Finally, the plan will be concluded with ideas for the proposed marketing mix plan of this product and then a re-emphasis of why this plan will help RealFlex become Reebok’s number one shoe. Situational Analysis The Company The Mission at Reebok is to be on the cutting-edge of sport and lifestyle products built upon a strong heritage in sports (Reebok, 2011).Reebok strives to challenge convention and lead through creativity and have been doing so for over 100 years (Reebok, 2011). The company was founded on one important value in the 1890’s, helping athletes run faster (Reebok, 2011). Since then the main vision has been to help athletes fulfill their potential (Reebok, 2011). Reebok is an American- inspired global brand, which celebrates individuality of the athlete while also helping the athlete to obtain goals they once thought unattainable (Reebok, 2011). Reebok is a subsidiary of Adidas Sportswear. Current Marketing MixProduct and Pricing: RealFlex Footwear is a Reebok innovation designed to give the foot a barefoot feel through natural movement while providing the comfort of a high-quality running shoe (Businessweek, 20011). RealFlex features 76 independent â€Å"sensors† on the bottom of the shoe which are design ed to naturally conform to the motion of the foot (Businessweek, 2011). This technology allows the foot to be 20% lower to the ground, which helps to re-create the feeling of bare feet (Tuttle, 2011). The RealFlex is priced at retail for $89.. 99, which Reebok feels is an affordable and fair price for this first-of-its-kind shoe (Businessweek, 2011).Promotion and Placement: Advertising for this shoe has been centered on the 76 â€Å"running buddies† or tread sensors, which make for natural movement of the foot (Reebok, 2011). RealFlex is also advertised to make the customers running style more pure through the barefoot feel. These shoes have been advertised through a commercial ad campaign which digitally animates the 76 running buddies as trail-running enthusiasts (Reebok, 2011). These shoes can be purchased online at Reebok. com as well as through various large-chain department stores such as Dillard’s, Nordstrom and Macy’s.Features and Benefits The RealFlex o ffers customers many different features. The top feature of the footwear lies in the sole of the shoe where there are 76 individual tread sensors. Other features include lightweight materials, breathability, and the ability for customers to customize their own pair of shoes. The benefits, or how the shoe actually helps the customer, are primarily based around the fact that RealFlex is a minimalist shoe. The barefoot technology featured in this footwear has been proven to strengthen legs so that runners can run faster for longer.Since this is a barefoot shoe, runners get all the benefits of running barefoot without extra damage to their feet. Current Product Life Cycle Realflex has only been on the market for about seven months and Reebok is still attempting to win over the customer’s preference through current advertising, promotions, and word of mouth (Reebok, 2011). Although RealFlex technology is a new idea in the world of â€Å"barefoot-style† running shoes, this p roduct is no longer in the growth stage. Athletic running shoes, including Realflex, are considered to be in the maturity stage.The Industry The United States footwear industry consists of makers of â€Å"non-cleated† rubber and plastic footwear that are meant for fitness and athletic purposes. The companies that are competing in this industry are dedicated to creating performance footwear so that they can give the customer more value and utility. Each company then segments its product lines to better satisfy the many different customer needs (Tufts University, 2006). However, there is significant overlap in the types of shoes that the athletic footwear industry sells.The athletic footwear industry is dominated by more than 230 manufacturers that make up over 50% of the market share (Hoovers Inc, 2006). However, there are only 19 companies that are actually competing in the athletic shoes industry. Reebok dominated the athletic footwear market until the late 1980’s whe n Nike made its sudden rise to power (Tufts University, 2006). Considering to market share, Nike leads the pack and is projected to continue growing as it expands more into China and India (Woolsey, 2007). However, in 2005, Adidas merged with Reebok in an attempt to raise the stakes in the competition with Nike (Howard, 2005).Price is one of the four categories in the marketing mix. A good pricing strategy is vital to every company. There are many different elements that can influence pricing such as unique technological product features, prominent brand names, celebrity endorsements and higher quality materials (Walker, 2005). There are some brands of shoes that sell for more than $200, such as the Nike Michael Jordan 2011 shoes, and there are brands that sell for less than $50 (Nike, 2011). However, it is more common for shoes to sell for $85 – $110 (Nike, 2011). Each company’s promotional tactics bear differences and similarities.While Reebok started with the primar y goal of improving athletic performance with its hi-tech running shoes, Nike began by specializing in running shoes and has since formed its own â€Å"running culture† by sponsoring major running events like the Chicago Marathon (Reebok, 2011). In fact, athletic shoe companies sponsoring races ranging from small track meets to nationally elite races, such as the Boston Marathon, are quite common in this industry (B. A. A. , 2011). A company will attend one of these events in order to promote its product as well as to help give back to the community (B. A. A. , 2011).These events provide very good advertising for the company and increase product visibility. Environmental Forces There are two types of environmental forces, macro and micro. Here, the macro environmental forces that affect Reebok are examined. These forces consist of social, economic, technical, regulatory, and competitive. These forces are external and usually uncontrollable. Social: Whether it is a change in d iet or an adoption of a fitness regimen, Americans are trying to improve their health. Sources say that Americans are exercising more, especially when compared to 2001(CNN Health, 2007).Health is becoming an American priority especially for younger generations (Saxena, 2010). Since fitness is becoming more of a lifestyle, running can be considered a growing trend. Fitness junkies and avid runners are starting to wear more and more â€Å"natural running† inspired shoes (Johnston, 2011) The Reebok RealFlex is the response to this growing trend (Runners World, 2011). Economic: With the economy taking a major downturn, fewer Americans can afford expensive gym memberships or personal trainers but still feel the need to be fit.Since the economy has been slow, Americans are turning to more affordable ways of exercising (Wilkes, 2011). One of the most affordable ways to get fit is to go running. There has been a spike in the sale of athletic shoes since the U. S. has begun to struggl e more with the economy. In fact, there was a 3% increase in the sale of athletic footwear in 2010 alone (Lets Run, 2010). Technological: Keeping up with the technology involved in running is a constant concern for innovative companies since the type of shoe a person wears can affect their performance.The weight of a shoe can affect the stride and development of the muscle (Runners World, 2011). The weights of shoes are also believed to affect races times and can mean the difference between a win and a loss (Lovett, 2010). It is imperative that athletic shoe companies are innovative in providing products that really do improve athletic performance without compromising the health of the consumer. Regulatory: Two regulatory entities that should be considered are the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC). The actions taken by the FTC and SEC are meant to protect consumers.Reebok recently settled a dispute with the FTC regarding false advertisin g of its Easytone shoes (Forden, 2011). This dispute was because Reebok claimed that its Easytone shoes were proven to actually strengthen buttock muscles by 28% and build calf muscles by 11% (Forden, 2011). The finalization of the dispute ended up costing Reebok $25 million (Forden, 2011). Competitive: In terms of competition there are significant barriers to entry, especially with light-weight performance shoes. Many companies are focusing on making light weight shoes a core competency.However, the question of which company has greater competitive advantage in the market is yet to be determined. Vibrams, the creator of the original natural running shoe, set up its web site to highlight the scientifically proven health benefits of natural running (Pain from Running, 2011). Additionally, Nike dominates the athletic apparel industry and pioneered the way for performance shoes when Bill Bowerman used his wife’s waffle iron to make the first prototype of his own light weight sho e (Vann, 2011). Competition Reebok faces fierce competition from all sides.The athletic shoe industry is quite large and very competitive. Reebok receives most of its competition from Nike. In addition to Nike, Reebok goes up against Asics and New balance for direct competition, as these companies all sell shoes similar to Reebok’s Realflex. Deckers Outdoor Corporation is considered indirect competition as it sells non-athletic footwear. Nike: Nike is the number one producer of athletic shoes in the world. One of Nike’s greatest strengths is brand recognition and branding. Nike’s slogan, â€Å"Just do it,† along with the famous â€Å"swoosh,† are known worldwide (Marketing Teacher LTD, 2011).Nike is continuously changing and updating its products and advertising. The company uses many different marketing strategies which are geared for several different target markets (Nike, Inc, 2010). Nike, like Reebok, does not manufacture the shoes it sells. In stead Nike hires subcontractors in other countries who manufacture the shoes. These manufacturers then ship the shoes to other companies to sell. This can be both a weakness and a strength for Nike. It is a weakness because of the dependency on the overseas manufacturer. However, it is also a strength because Nike’s money can now be sed for expanding its product line or on a new advertising campaign instead of on the purchase and upkeep of buildings (Marketing Teacher LTD, 2011). Asics: In 2009 Asics celebrated the grand opening of its first stand-alone U. S. store located in New York (Asics, 2009). This store also featured the revolutionizing 3-D Foot ID to help the wearer become matched to the perfect shoe for them. The expansion of Asics in New York has allowed greater influence of the brand name across the U. S. , which has helped to increase sales revenues (Just-Style, 2009).Asics just launched an all-out advertising campaign in 2011 that included TV, radio, Internet, pr int as well as being a co-sponsor in the ING New York Marathon (Fashion United, 2011). One of the weaknesses of this campaign is the disproportionate focus on the overseas market compared to the U. S. market (Fashion United, 2011). Asics’ cash flow and net income had been falling slowly for several years and it needed to do something to improve profits. This campaign was extremely expensive but already Asics is seeing a return from investment and an increase in its net income (Larmann, 2011).New Balance: New Balance’s top strength would be the technology and innovation of its new products (New Balance, 2011). Every year New Balance creates a new and updated product with all the latest in technology. In addition, The New Balance Foundation has given back more than $40 million to the community and non-profit organizations (New Balance, 2011). More than 50% of consumers want to purchase a product if they know that a portion of the profits will go to charity (Strahilevitz & Myers, 1997). New Balance relies on promotion through the sponsorship of races and fitness activities instead of using celebrity endorsements (Johnson, 1998).The strength of not using celebrities is that the price of the shoe will be less for the consumer since New Balance does not pay for the endorsements. However, the downside to this is that the younger generation is attracted to shoes that have been associated with top celebrities (Johnson, 1998). Deckers Outdoor Corporation: Deckers is an indirect competitor for Reebok because they do not specialize in athletic footwear but instead are focused mainly on high-quality sheepskin boots and sandals (Wikipedia, 2011). Deckers’ biggest strength is its quality. The company is focused on roducing very high-quality products while lowering the impact to the environment (Deckers, 2011). Deckers helps to lower the impact to the environment by using a lot of recycled materials for the creation of its products (Deckers, 2011). More t han 30% of consumers want to purchase environmentally friendly products (American Express, 2010). One of Deckers weaknesses is that it has focused about 75% of its efforts in advertising to the U. S. This strategy has resulted in a higher market share for the US but a lower share across the nations (Deckers, 2011).Deckers is now working harder than ever to increase the sales of products in its overseas locations (Deckers, 2011). (See Appendix A – Competition Table) SWOT Analysis A SWOT analysis is a critical portion of every marketing plan. It outlines the company’s Strengths and Weaknesses, and the market’s Opportunities and Threats that pertain to the product (Wikipedia, 2011). The SWOT analysis is an important step in planning as it outlines whether the information will assist the company in completing its objectives or if there will be an obstacle that must be moved first.Strengths: The Reebok Realflex barefoot shoes have several strengths integral to the pr oducts current and future success. The Realflex is scientifically proven to reduce the risk of foot injury since it is made of strong materials that resist distortion by weather and sharp objects (Sturtz, 2011). The Realflex has 76 independent sensors on the bottom of the shoe that adapt to all training surfaces and promote natural movement (India Infoline Ltd, 2011). Reebok also produces outfits to match the colors of shoes and color customization on new Realflex purchases to meet customers’ needs (Healthhabits, 2011).Reebok is one of the top athletic shoe companies in the U. S. with a market share around 20% and it has become more efficient through good corporate operation strategies aimed at restructuring and improving quality in the manufacturing process (Landrum & Boje, 2001). Reebok also prices its shoes to be around the average market price which helps to increase market share. Weaknesses: One of the weaknesses of the company is that Reebok has no factories and depends on overseas manufacturers for production of its products, consequently posing a risk since the contracted industries could stealReebok’s designs (Dunlap, 1925). Reebok owns few stores of its own but depends mostly on retail stores to order and deliver the products, which at times can be slow. This strategy causes retailers who sell the products to wait long periods of time before the products arrive, at which time they may not have the same popularity among customers (Hoovers, 2011). There are very few sponsors associated with Reebok which does not help to make it well known (Mercer, 1996). In addition, the company suffers from the previous release the Reebok Easytone, which claimed to tone legs and burn more calories while walking.This was actually revealed to be untrue by the American Council of fitness (Waehner, 2010). Essentially misleading consumers can cause them to be cautious of the Reebok label and they may instead choose to shop elsewhere (Nickson, 2010). Opportuni ties: There are several opportunities for Reebok, including expanding and reaching new markets with its new product. Reebok has the opportunity to appeal to baby boomers creating a new market for its type of shoe. They are a generation interested in staying active as they age.There is also the opportunity to market to active college students; it all depends on how the product will be presented. There is also the opportunity for product development since Reebok has released a new product into the current markets. Threats: There are many competitors offering a similar barefoot shoe product which is a threat to Reebok since competing companies, like Nike, are already established and globally recognized (Silva, 2011). In addition, technology is always changing and new products are continuously coming out into the market.The fast change in technology goes hand in hand with how society is constantly changing its mind, which poses a great threat due to the company’s low rate of tech nological advancement compared to the prevailing leaders (Kagz, 2001). Competing companies may introduce cheaper substitutes which the customers may opt to buy. Economic crises also pose another threat due to the weak purchasing power of the customers. As barefoot shoes are a want and not a need, the economic crisis may have people think twice before buying. See Appendix B – SWOT Analysis) Critical Issues and Marketing Objectives Critical Issue #1: Leverage Point: Healthy shoe (S) + New Market: Baby Boomers (O) Natural Running shoes offer health benefits and by advertising to a new market like baby boomers and the older generation (ages 40-65), Reebok has the chance to create a leverage point. Related Marketing Objective #1: Increase sales by 10% over the next year. Strategically place the product in areas whose demographics reflect a baby boomer population. Have the product easily accessible to the target market.Critical Issue #2: Constraint: Previous Faulty Products (W) + E xpanding the Market (O) Reeboks previous innovation in fitness, the Easytone, was proven to have no additional benefit to working out as they claimed. When Reebok does try to sell its product to a new market that may be more aware of Reebok’s previous mistake they may have no interest in purchasing the new technological innovation the RealFlex. Marketing Objective #2: Focus on the health benefits of RealFlex over regular shoes. Show consumers that Realflex can help improve strength in leg muscles. Increase shoe health awareness by 15% within one year.Critical Issue #3: Vulnerability: Healthful Shoes (S) + Changing shoe Technology (T) Reebok RealFelx shoes face vulnerability in the sense that while it may be producing shoes with health benefits, the competition could be offering shoes with even greater benefits, such as Virbram Five Fingers. Marketing Objective #3: Demonstrate to consumers how much Reebok invests in its consumers best interests. Focus shoe marketing not only o n the health benefits but how Reebok was able to pioneer the light weight shoe industry with its â€Å"sensors† on the bottom of the shoes.Segmenting, Targeting, and Positioning Segmenting Some of the possible ways of target segmentation for the Reebok Realflex shoes are geographic, demographic, psychographic, and behavioral. The geographical segmentation would focus on those consumers in the urban and suburban locations due to the high influence of social media. The demographic segmentation could target consumers with a yearly household income of greater than $35,000 as well as specific age groups, such as ages 18 – 44, as many purchasers of running shoes are ages 18 – 44 (Marginy Research Group, 2000).Reebok could also focus on the psychographic segmentation portion and gear it toward consumers who enjoy adventure and outdoors activities. Reebok decided to segment the markets into two separate groups. The first target market will focus on geographic and demogr aphic segmentation. This market will include college students between the ages of 18-24 who are adventurous. The second target market will focus on demographic and behavioral segmentation. This market will include those consumers who are in the older generation, like baby boomers. The older generations want to stay healthy and get into shape.The Realflex is perfect for this need, as the barefoot qualities of the Realflex strengthen legs and keep runners healthy. Targeting Target Market 1: The target market is for adventure seeking and active college students between the ages 18 and 24. These targeted college students usually reside in urban and suburban areas. The focus on these geographical locations is due to the idea that consumers in highly populated areas, such as a city, are more driven by the social media that surrounds them (Thompson, 2009). The targeted psychographic market segments are geared toward those consumers interested in competition and adventure.Reebok wants consu mers who want the shoes they wear to be able to handle anything during their fitness routine. â€Å"Americans who have adopted the lifestyle of Fit Consumers are risk-takers with an adventurous outlook on life. Fit Consumers retain a taste for adventure as they age† (Packaged Facts, 2007). The Realflex is a high-quality running shoe that is able to satisfy the needs of competitive, driven college student runners. The Realflex weighs only 8. 8 ounces for males and 7. 2 ounces for females (Jhung, 2011). This reduction in weight helps shave off seconds on a runner’s time.This gives the runner a competitive advantage over those runners who are not using lightweight shoes (Jhung, 2011). These students are always looking for the next best thing to own, especially when it comes to shoes (Trend Watching, 2011). They want high-quality, lightweight shoes for a great price. Students also want to know that the product they buy and wear is something that will help improve their sta nding in society (Trend Watching, 2011). Reebok can give that customer value, and more, to this target market. The college student target market is 18. 6 million, which is a 22% increase over the last 8 years alone (Davis & Bauman, 2011).With a larger target market there will be a higher cost to reach the audience. However, with a slight increase in advertising geared toward this growing market, Reebok will be able to reach this group and increase sales by 10% within 1 year. (See Appendix C – Positioning Map 1: College Students) Target Market 2: Aside from the younger generations, baby boomers and the aging population (40-65) are looking to preserve as well as better their health. Reebok wants to attract the consumers who will find its product integral to the way they want to look and feel as these consumers will â€Å"place a high priority on their health† (Packaged Facts, 2007).They consider running part of a healthy and active lifestyle. Studies suggest that baby bo omers and aging populations are much more active than they used to be. In 2005, baby boomers comprised one fourth of the health club memberships (msnbc, 2005). However, these consumers may not all be high users. Some of them may only visit the gym a couple of times a month or only run a few miles a week. Baby boomers are redefining what it means to retire and enjoy old age, they are not anticipated to flock to an â€Å"age segregated community† and many will likely continue working in some capacity (Brandon, 2010).However not all Boomers have a high disposable income in fact, they are considered a sandwich generation were they are assisting their own parents while financing their children’s educations. With Boomers still maintaining busy schedule it is also important to consider the usage rate that would justify the purchase of Reebok Realflex shoes. They may seem themselves needing a â€Å"healthy shoe† meant for their variations in fitness regimen. This same n eed can be applied to the aging portions of the population. The trend of healthy living is catching on and the market for healthful products, like quality running shoes will continue to grow.In consideration to Critical Issue #1 of advertising to the market of baby boomers, the Realflex shoe has a considerable leverage point given that it is a scientific fact that natural running shoes offer health benefits. It is also a fact that light weight running shoes are built to endure fewer miles because they offer less cushioning however they offer health benefits like a â€Å"natural running sensation†(Run/Split, 2011). It is the use and health benefits that are more likely to draw Boomers to the product. In regard to the marketing objective of increasing sales by 10% over the next year,Reebok plans to place its product in gyms by giving a pair to local trainers to act as opinion leaders and encourage boomers to purchase them. Reebok also plans to place the product in convenient pl aces for purchases, such as mall outlets to increase product visibility as well as specialty stores. (See Appendix D – Positioning Map 2: Baby Boomers) Positioning Beginning in 2009, Reebok started executing strategies in order to position its running shoes in a more technologically advanced, higher quality and flexible category which helps to differentiate the shoes from other athletic brands and place it toward the high-end footwear brands.Reebok’s mission is to become an outstanding sport and lifestyle brand and offer many primary sports products (Adidas, 2011). In regards to the younger generation, there needs to be an emphasis on the fact that Reebok is a fashionable shoe to wear while either getting fit or just out taking a stroll. Reebok can position this product as being both quality and healthful by occupying the front window of athletic stores. While doing so may increase the cost of promotion, it sends a message to the younger generation that the product is popular, and at a minimum increases visibility making the product more widely known.There will not need to be repositioning for this target market. In consideration to the second target market, baby boomers and aging populations, there will be some repositioning that needs to take place. As previously noted Reebok made the mistake of producing a product that did not have all the health benefits the company claimed. In fact, the Reebok Easytone has been rumored to have done more harm to customers than good. It is the older populations who are more likely to be aware of this mistake which means that Reebok would need to reposition this product in the mind of older consumers.Both of these methods will increase consumer spending on Reeboks product and assist in attaining the goal of a 10% increase in sales within one year. In regards to the second marketing objective, placing the product in gyms and actively seeking feedback from users shows the interest that Reebok has taken in demonst rating that its products are of high quality. Similar is the third marketing objective, concerned with the proving that Reebok is an innovator in the shoe industry, this is accomplished not only through placing the product in gyms and giving trials to first time buyers but also through actively seeking feedback from users.The feedback Reebok receives form users will help in creating lighter, even higher quality products to better satisfy consumer needs and enhance their athletic performance. Positioning Statements Positioning Statement 1: For college students who typically maintain an active lifestyle and like access to new products, Realflex footwear is the latest model of Reebok running shoes with advanced technologies to improve athletic results as well as allow consumers to customize the color of the shoes.Positioning Statement 2: For baby boomers that pursue a healthy lifestyle, Reebok Realflex footwear is the natural running shoe with high tech soles and light-weight materials that is designed to provide the health benefits of natural running. Proposed Marketing Strategy Product Reebok would not be doing any product modification to the RealFlex shoes. Instead, Reebok would be focusing on enhancing the RealFlex image while on store shelves. Reebok would make the shoes as appealing to the consumer as possible. An efficient way to appeal to consumers is to offer a more classic look in stores while also offering the benefits of RealFlex.Reebok would offer basic colored shoes in stores such as navy, gray, black, and white, along with accent colors such as blue, red, and green. The more eccentric colors, like orange and yellow, would be available online when customizing the shoes. This will be an effective strategy for the RealFlex because it would attract more customers who are looking for a dual-purpose shoe to fit their everyday lifestyle. This strategy is designed to attract customers who are not looking for flamboyant aesthetics in their shoe choice.This is based on the belief that classic colors will cover a larger demographic, while still having more specific needs accessible online. These shoes will be packaged in a simply designed box that features bare feet and the Reebok RealFlex logo. Shoe packaging tends to be generally more functional than appealing to the consumer as the shoes can sell themselves (Packaged Facts, 1998). However, consumers enjoy showing off their latest purchases, and this newly designed box has the perfect accent to combine with the Realfex shoes. (See appendix E – RealFlex Packaging) PricingPricing is an important factor that affects the marketing of a product and consumers’ attitudes toward that product. Consumers tend to shop for lower-priced commodities so long as quality is not compromised (Daly, 2002). In order to arrive at a fair price for the RealFlex shoes, Reebok considered several different pricing strategies and evaluated the effectiveness of each strategy in line with its marketi ng plan objectives. The best price strategy for the RealFlex shoes is the At-Market Pricing Strategy. Reebok set the base price at $89. 99, with the customization options ranging from $5-$15 extra.The price is comparable to the market price and to what the competitors are offering. Reebok’s largest competitor, Nike, is offering similar shoes at the same price (Nike, 2011). However, New Balance sells its similar shoes for $95 while Asics sells its shoes for only $85 (New Balance, 2011). This pricing strategy allows Reebok to make a profit while still encouraging for a larger market share. Reebok wants to attract active college students and baby boomers to purchase the product because of its high quality and average price among rivals.There is a large portion of the target market, college students in particular, that are unemployed due to full-time school or retirement. Reebok’s pricing strategy is designed to enable the company to achieve a large and dominant market in line with the marketing objectives. The At-Market Pricing Strategy achieves objectives and enhances profits. Placement Reebok will market the Realflex primarily through retail channels. This is done because in-store shopping is one of the most important portions of the customer decision-making process when purchasing a product.A few of these retail channels will include Foot Locker, Athlete's Foot, and Champs Sports. Reebok will concentrate more heavily on placement in states where residents are more likely to engage in a healthy and active lifestyle, such as Colorado, Oregon, and Minnesota (Nash, 2010). Through the use of these channels and placement, Reebok can raise its brand awareness and increase customer loyalty. Reebok wants the retail environment to highlight its brand value as â€Å"inspirational, athletic, fun, and interactive† (Adidas, 2011).One of the target markets, baby boomers and the older generations, want to purchase high quality products in order to maintai n their health (Health Goji, 2010). They enjoy going to the retail chains so that they can try on the shoes and make sure that they feel good while walking. They are also able to go online if they do not find the color that they like and they can purchase from the Reebok website. The other target market, college students between the ages of 18-24, wants to purchase shoes that go with their physical appearance (Makgosa ; Mohube, 2007).They enjoy going to the retail chains so that they can try on the shoes and make sure that they look good while walking or running. This market can also go online if they would like to customize their shoes to have a little more color. Promotional Plan Health and enhancing athletic performance will be at the forefront of the Reebok Realflex promotional campaign. The shoe itself is meant to provide the sensation of natural running while still protecting the consumer’s feet. This will allow the consumer to be able to run the extra mile that complet e barefoot shoes will not allow.There is a big difference as to how far athletes can run in barefoot shoes opposed to actual running shoes. Reebok wants to convey to consumers that it is concerned with their health and it is dedicated to improving their athletic abilities through the use of the Realflex shoe. It is evident that consumers in both target markets, college students as well as the older generations, are concerned with their health. However, there will be a greater emphasis on the health benefits to the older generation, as this is a major appeal. It is common practice in athletic apparel to feature fit models using the product in beautiful locations.Reebok would follow suit. Reebok needs to communicate that â€Å"no matter where you are, you can take health with you with the Realflex shoe† This message could be particularly effective when considering older generations. They are more likely to travel and are redefining â€Å"retirement. † By positioning the product as healthy and useful there is a direct appeal to the needs of Reeboks’ aging consumers. (See Appendix F – Magazine Advertisement and Appendix G – Billboard Advertisement). With regards to younger consumers, like college students, there will be an emphasis on the message that the Realflex is meant for their active lifestyle.It is designed to enhance athletic performance because as a natural running shoe it alters the pronation in the foot as it strikes the ground increasing the amount of work the muscles do when the shoes are being used. It enhances the workout for these younger generations, especially those who are aware of the benefits of natural running (Appendix H – Advertisement). It is imperative that both target markets are able to view the product as both healthful and athletic. The key issue that must be avoided is that the style of the shoe is not exclusive to either target market.This issue can be resolved through the use of blending th e concepts of health and athletic performance in advertisements. Reebok intends to do this primarily through advertisements featuring outdoor settings and races. (See Appendix I – Billboard Advertising) Television commercials could prove more useful as a mode of advertisement. With the Reebok Easytone shoe, Reebok spent $64 million on advertisements of the Easytone shoe. Sales of that particular shoe increased until it was discovered that Reebok used faulty advertising as a means to sell the shoe ( (Morran, 2011).The campaign for the Easytone shoe was one of Reeboks largest in a decade. For the Easytone shoe television ads were highly effective in reaching target markets and increased sales. Reebok is hoping for a similar effect when it comes to the Realflex shoes. Many other companies also use television as a means to advertise because it can reach millions of consumers for only pennies on the dollar. A smaller athletic company, Asics debuted a new national advertising campa ign and the ING New York City Marathon, some of which includes television ads. In correlation with their new campaign they have also seen increases in profit (Asics, 2011).Aside from television, another mode to advertise to consumers is through magazines like that are specific to fitness and popular culture. Magazines that Reebok wants to place its full page ads in would be Runners World, Women’s and Men’s Health magazines, Shape, GQ and Cosmopolitan. These are the magazines which are better suited to reach both target markets. The anticipated cost for full page ads in these magazines range from $20,000-$25,000, however, these prices can fluctuate depending on the magazine and how much of a region it covers (Becket, 2009)..Magazines like Runners World and Running Times are the most vital to communicate how viable the Reebok Realflex is as a running shoe. In a lot of ways it is the way to get a seal of approval as a product. The more runners Reebok can get to buy the sh oe, the greater the visibility and the more likely others are to follow suit and purchase their own pair of Realflex shoes. While television and magazines are useful, one of the best ways to gain attention in the world of fitness is to be present at major running events like races and expoe’s.Brooks Running shoes sponsor some Rock and Roll Race events; one of their biggest is the Denver Rock and Roll Marathon. They have nearly half of the floor to showcase their products and their benefits. Not to mention that they are able to make those last minute sales to participants. Participation in major races like, half marathons, full marathons, national race teams, Reebok again increases visibility and is able to position their product as a product for fitness. Costs of sponsoring races vary depending on the size of the race.However, Reebok could take a different approach and rather than advertise and sponsor at a major races like Chicago, NYC and Boston Marathons, sponsor multiple races in the Rock and Roll Marathon series which features over twelve races in the United States and three in Europe. Through these modes of advertising Reebok is able to reach both target markets and convey the healthfulness and the athletic performance benefits that come with the use of the Realflex shoes. In regards to sales promotions, Reebok will utilize both retailers and consumers to increase product visibility.However, Reebok will focus on going primarily after the consumer, through consumer sales promotions. Methods Reebok intends to use would be product samples and prizes. We would let the consumer try one Reebok product in the store and test it out for a day and if they do not like it, tell Reebok why to refund the purchase. Another tactic to take advantage of and redeem Reebok from the Easytone bad press would be when consumers bring in a pair of Easytone shoes Receive half off of the purchase of Realflex shoes. This specific method, allows Reebok to do damage control th rough public relations of sorts.Reebok can pick specific locations where previous buyers of the Easytone shoes can return their purchase for half price pair of Realflex shoes. It is imperative that to successfully launch and market a product that Reebok fix their previous indiscretions in regard to the Easytone shoes. As discussed earlier, advertising will play a major role in positioning the Realflex as both healthful and performance enhancing. It will be what the consumer sees in their magazines, on their televisions and in their gyms. However, the personal selling aspect will also define how the customer views the product when they come into a store to purchase them.While Reebok has its products in major athletic stores like Dicks Sporting Goods and Sports Authority, it’s important to make sure the retailers are well informed about the product, and provide the opportunity to test out the shoe on treadmills before purchase. In regards to the actual Reebok stores, retailers there need to take interest in creating a unique purchasing experience for the consumer. This can be done through acute attention to consumer needs and demonstrations of the products use, and the ability to test out the products in the store.When it comes to selling, Reebok Retailers need to sit one on one with consumers and be attentive to their needs. While this method may be expensive it will provide that unique customer experience and encourage repeat business. Sales promotions will also be done through visibility at expos and major races. Asics provides supplies for the New York City Marathon and Brooks provides supplies for the Rock and Roll Marathon series which allows them to dominate pre and post-race expos to encourage buying. It also increases visibility among consumers who are likely to buy the product.This method allows Reebok to go to the consumers rather than trying to get them to come to a store. While the fees can be expensive, there is probability that consumers wi ll see the product and the company as one with their best interests at heart. Similar to being present at expos would be an adaptation of contests, ask small local races where participation is below three thousand and give a free pair to each race winner or each division. This is a means to also build good will among potential consumers and entice potential runners into competing.The least used promotional element will be direct marketing, as the cost of communication through mail and telephone. The one way Reebok would consider using mail as a means to communicate with consumers would be to send notices regarding the shoe with an explanation of the healthy benefits. The mail would also only go to previous customers to encourage business or members of a loyalty program as they may be more likely to want to purchase the product, if they have been satisfied with their previous purchases.With all of the factors of the promotional mix in mind the most effective strategy for Promote the Realflex shoe would be the Push strategy where personal selling is directed to intermediaries. It’s is easier to utilize a pull strategy because it allows greater accessibility to the product by already placing the shoe in malls and specialty stores. What is important to recognize is that each piece of the promotional mix fits together to convey a single coherent message to consumers, Reebok is a company committed to producing quality products to enhance health and athletic performance.The variation in the promotional mix will be used as a means to communicate this message to target markets. The variety in methods will ensure that since Reebok is seeking older generations (40-65) as well as those aged 18-24 who are active, they are destined to come into contact with some type of positive promotion of the product. MarketTrak Tool Reebok uses a MarketTrak spreadsheet to show the projected cost of achieving its objectives for one year. This spreadsheet shows each of the three ma rketing objectives and breaks them down into several different tasks that can be completed within one year.Through the use of billboards, television commercials, sponsorship promotions, and website advertisements, Reebok hopes to achieve its marketing objectives. The first marketing objective on the MarketTrak spreadsheet is to increase sales by 10% within the first year. Reebok will achieve this goal with the use of billboards, magazine ads and special promotions. First, Reebok will design a billboard geared toward the older generations, aged 40-65, and strategically place them in areas that are largely populated by the older generations, like Tampa, FL, Austin, TX, and Phoenix, AR (Coach, 2011).Second, Reebok will place advertisements in special sports magazines, like Runner’s World and Sport’s Illustrated. Then, Reebok will offer several pairs of shoes for free to retail stores such as Dick’s Sporting Goods and Sports Authority. These shoes can be tried on th e treadmills at these stores so that consumers can see that the shoes are comfortable. Finally, Reebok will offer a discount price for 1 month on the shoes followed by 1 month of free shoe bags with purchase. The second marketing objective is to increase the awareness of the healthy nature of the Realflex shoe by 15%.This will be achieved by giving 500 free pairs of shoes to trainers in gyms that are located in ten of the healthiest cities across the United States, like Boston, MA, Portland, OR, and Denver, CO (Haiken, 2011). These shoes will be used by opinion leaders who are in a position to show just how comfortable and healthy these shoes are. In addition, Reebok will give two extra free pairs to each trainer so that they can use them to give away to a couple of lucky gym members. Finally, Reebok will create a television advertisement geared toward the specific health benefits of the shoes.The third and final marketing objective is to increase the awareness of Reebok’s in vestment in the consumer’s best interest. This will be done several different ways. To start, Reebok will create an online advertisement showing the overview of the lightweight shoe design and how the design helps with healthier running. Then, Reebok will add a new section onto its website explaining how much time and effort Reebok has gone to in order to create a shoe that really is better for your muscles and legs. Then, Reebok will design a moving billboard advertisement to be placed onto city buses that operate in large college cities, like Denver.This advertisement will show the wonders of the Realflex sensors. And finally Reebok will design a different television advertisement that shows all of these investments in our consumers. In order to ensure the success of each of these marketing strategies and tactics, Reebok’s marketing managers will have a meeting at the end of each month to go over each of the objectives to see how well they are working. These meetings will allow for each of the managers to learn what is going on, see if the objectives are being met, and improve anything that needs to be upgraded.This is done so that everything moves along smoothly and nothing is forgotten in the process. (See Appendix J – MarketTrak) Conclusion Reebok is positioning to be a high-end athletic footwear brand and a leader in its industry. In the next three years, the market development and product repositioning will allow Reebok to achieve its marketing objective which increases sales by 10%. College students and baby boomers alike can wear Realflex while performing a multitude of exercises. Its smart and stylish appearance allows it to be worn daily. With the previous issuance of a faulty product, Easytone, Reebok created a weakness in the company.However, with Realflex, Reebok can improve the past weaknesses by marketing its new â€Å"76 sensors† technology and wonderful health benefits. This technology can efficiently support the r unner's weight and flexibility. This product, along with focused advertising, will increase consumer awareness of the health benefits that come with the Realflex shoes. Furthermore, the target market will enjoy the convenience of shopping in more Reebok retail locations. This will help Reebok to increase advertising concerning the high quality performance and the health benefits within Realflex.With Realflex becoming more widely known, the product demand will increase. As a result, customer value will also increase. The final marketing objective is to increase awareness of how much Reebok has invested in its consumers best interests. Realflex implements the idea of â€Å"natural running movement†, emphasizes on lightweight materials, which its users can experience the barefoot feel. It shows to its target markets top quality running shoes with not only the health benefits, but also with the pioneer and innovation of its sensors to improve performance.Through the catering of s tyle with the young generation and the health concern of baby boomers, the team believes that Reebok will reach its marketing objectives and spur the success of this product. Appendices Appendix A – Competition Table Competitor| Year Founded| Years in Business| Locations Served| FY 2010 Sales| Offered Products| Direct orIndirect Competition| Nike| 1964| 47| World2| $19 Billion3| Athletic shoes, apparel, sports equipment, and accessories2| Direct| Asics| 19494| 62| World4| $2. 4 Billion5| Athletic shoes, apparel, and sports equipment4| Direct| New Balance| 19066| 105| World6| $1. Billion6| Performance footwear, apparel and accessories6| Direct| Deckers Outdoor Corp| 19737| 37| World7| $1 Billion8| Sheepskin boots, casual wear, slippers, and sandals7| Indirect| Appendix B – SWOT Analysis | Favorable| Unfavorable| Internal| Strengths(1) Brand Equity(2) Reebok-Adidas merger. (3) Reebok is one of the top athletic shoe companies in U. S. in terms of market share. (4) Barefoo t shoes are scientifically healthier than any other kind of shoes. (5) 76 independent sensors on the bottom of Reebok Realflex barefoot shoes promote natural movement, flexibility, and comfort. (6) The price is the average of main competitors. 7) Customizing the shoes with the styles and colors customers prefer. | Weaknesses(1) Reebok owns few official stores and relies more on retailers. (2) Reebok doesn’t own factories and they depend on producing industries in their production. (3) Previous reputation of releasing faulty products. (4) Few sponsors associated with Reebok. | External| Opportunities(1) Expanding current market and reach current markets with their new products. (2) Marketing towards several age groups to increase profits. (3) Product development opportunity. (4) Expanding to market for the product on social media websites. 5) Creating new channels of communication on social media websites. | Threats(1) Many companies produce barefoot shoes and this leads to a strong competition. (2) Changing trends in footwear technology. (3) As barefoot shoe is a want and not a need, some people may think twice before purchasing. (4) Poor economy| Appendix C – Positioning Map 1: College Students Appendix D – Positioning Map 2: Baby Boomers 5 Appendix E – RealFlex Packaging Appendix F – Magazine Advertisement Appendix G – Billboard Advertisement Appendix H – Pro-nation Advertisement Appendix I – Billboard Advertisement Appendix J – MarketTrakAppendix K – Glossary of Terms At-Market Pricing Strategy Attributes Barriers to entry Beliefs Brand Awareness Brand Value Branding Channels Competitions Competitive Advantage Competitors Consumer Consumer’s attitudes Consumer Spending Core Competency Cost Current market Customer Loyalty Customer Value Differentiation positioning Direct marketing Discretionary Spending Disposable Income Good Will Growing Market Growth Stage Indirect Competition Lea ders Market Market price Market share Marketing Mix Marketing Plan Objectives Maturity Stage Need Opinion Leaders Opportunities Packaging Personal Selling Placement Positioning PowerPricing Pricing strategies Product Product Development Product Modification Promotional elements Public Relations Purchasing power Push strategy Reposition Retail Retailer Sales Promotions Segment Social Status Strength Substitutes Target Market Threats Utility Value Want Weakness Bibliography Adidas. 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Research Project An History On Currency Derivatives Finance Essay - Free Essay Example

Sample details Pages: 23 Words: 6919 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Cause and effect essay Did you like this example? The money usage spans thousands of years. Earlier many items have been used as commodity money such as precious metals, cowry shells, beads etc. as well as many other things that could be thought of as having some value. Don’t waste time! Our writers will create an original "Research Project An History On Currency Derivatives Finance Essay" essay for you Create order The first people didnt buy goods from other people with money. They used barter. Barter is the exchange of personal possessions of value for other goods that you want. This kind of exchange started at the beginning of humankind and is still used today. From 9,000-6,000 B.C., livestock was often used as a unit of exchange. Later, as agriculture developed, people used crops for barter. For example, one could ask another farmer to trade a pound of apples for a pound of bananas. At about 1200 B.C. in China, cowry shells became the first medium of exchange, or money. The cowry has served as money throughout history even to the middle of this century.   They can be thought of as the original development of metal currency. In addition, tools made of metal, like knives and spades, were also used in China as money.   From these models, coins were developed which are in daily use. The Chinese coins were usually made out of base metals which had holes in them so that these c oins could be put together to make a chain. At about 500 B.C., pieces of silver were the earliest coins.  Ãƒâ€šÃ‚   Eventually in time they took the appearance of today and were imprinted with numerous gods and emperors to mark their value. These coins were first shown in Lydia, or Turkey, during this time, but the methods were used over and over again, and further improved upon by the Greek, Persian, Macedonian, and Roman empires. Not like Chinese coins, which relied on base metals, these new coins were composed from scarce metals such as bronze, gold, and silver, which had a lot of intrinsic value. In 118 B.C., banknotes in the form of leather money were used in China. One-foot square pieces of white deerskin edged in vivid colors were exchanged for goods. This is believed to be the beginning of a kind of paper money. During the ninth century A.D., the Danes in Ireland had an expression To pay through the nose. It comes from the practice of cutting the noses of tho se who were careless in paying the Danish poll tax. From the ninth century to the fifteenth century A.D., in China, the first actual paper currency was used as money. Through this period the amount of currency skyrocketed causing severe inflation. Unfortunately, in 1455 the use of the currency vanished from China. European civilization still would not have paper currency for many years. In 1500, North American Indians engaged in potlach, a term that describes the exchange of gifts at banquets, dances, and various rituals. Since the trading of gifts was so important in figuring the leaders community status, potlach went out of control as the gifts became more extravagant in an effort to surpass others gifts. In 1535, though likely well before this earliest recorded date, strings of beads made from clam shells, called wampum, are used by North American Indians as money. Wampum means white, the color of the clam shells and the beads. In 1816, England made gold a benchmark o f value. This meant that the value of currency was pegged to a certain number of ounces of gold. This would help to prevent inflation of currency. The U.S. went on the gold standard in 1900. Because of the depression of the 1930s, the U.S. began a world wide movement to end tying currency to gold. Today, few nations tie the value of their currency to the price of gold. Other government and financial institutions now try to control inflation. At present, nations continue to change their currencies. For example, the U.S. has already changed its $100 and $20 banknotes. More changes are in the works. Modern money is essentially a token in other words, an abstraction. Paper currency is perhaps the most common type of physical money today. The Sumer civilization developed a large scale economy based on commodity money. The Babylonians and neighboring city states later developed the earliest system of economics as we think of it today, in terms of rules on debt, legal contracts and law codes relating to business practices and private property. Future of money: Tomorrow is already here. Electronic money (or digital cash) is already being exchanged over the Internet. THE PROJECT Each country has own currency through which both national and international business transactions are conducted. All the international business transactions involve exchange of a currency for another. Foreign exchange markets provide the mechanism of exchanging different currencies with one and another, and thus, facilitating business transactions from a country to another. With the growth of international trade, trading in foreign currencies has grown many folds over the past. Since the exchange rates are volatile, trading firms are exposed to the risk of exchange rate fluctuations. As a result the assets or liability or cash flows of a firm which are denominated in foreign currencies change in value over a period of time due to exchange rate variation. The financial environment today has become riskier than before. Firms, which are able to manage these risks effectively are Successful business firms today. Due to changes in the macroeconomic structures, there has been a dra matic increase in the volatility of economic variables such as interest rates, exchange rates, commodity prices etc. Firms must monitor their risks carefully and manage their risks with judicious policies to enjoy a more stable business. Suitable mechanisms to manage and reduce such risks which are influenced by factors external to the business need to be adopted. One of the modern day solutions to manage financial risks is hedging. In this paper I have tried to examine about what are the hedging instruments (Currency Derivatives) available in India and how the business corporations are using currency derivatives as a risk management tool. CURRENCY DERIVATIVES A BRIEF HISTORY Bretton Woods system of administering fixed foreign exchange rates was abolished in favor of market-determination of foreign exchange rates in 1971, and a system of fluctuating exchange rates was introduced. Besides market-determined fluctuations, volatility in other markets around the world prevailed due to increased inflation and the oil crisis. Companies tried hard to come up with the uncertainty in transactions. Thats how financial derivatives foreign currency, interest rate, and commodity derivatives emerged as means of managing risks facing corporations. First ever future contracts were created by The Chicago Mercantile Exchange (CME) created FX futures in the year 1972. Leo Melamed, CME Chairman Emeritus helped creating these contracts by providing necessary guidance and leadership. FX contracts capitalized on the abandonment of the Bretton Woods agreement, which had fixed world exchange rates to a gold standard after World War II by USA. By creating another type of mark et in which futures could be traded, CME currency futures extended the reach of risk management beyond commodities, which were the main derivative contracts traded at CME until then. The concept of currency futures at CME was revolutionary, and gained credibility through endorsement of Nobel-prize-winning economist Milton Friedman. DEVELOPMENT IN INDIA The economic liberalization in early nineties provided the rationale for the introduction of FX derivatives. Business houses started actively approaching foreign markets not only with their products but also as a source of capital and direct investment opportunities. When limited convertibility on the trade account was introduced in 1993, environment became more favorable for the introduction of these products. Hence, the development in the Indian forex derivatives market follows the steps taken to gradually reform the Indian financial markets. The first step towards introduction of derivatives trading in India was the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options securities. SEBI set up a 24 member committee under the chairmanship of Dr. L. C. Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee recommended that the derivatives should be declared as securities so that regu latory framework applicable to trading of securities could also govern trading of derivatives. Trading in index options commenced in June 2001 trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. Standing technical committee was jointly constituted by RBI SEBI to analyze the currency market around the world and lay down the guidelines to introduce Exchange Traded Currency Futures in the Indian market. The committee submitted its report on May 29, 2008. RBI and SEBI issued circulars in this regard on August 06, 2008. Currently, Indian Currency market trades with all the major currencies like USD, EURO, YEN and POUND are traded. The rationale for introducing futures in the Indian context has been outlined in the report of the internal working group of Currency Futures (Reserve Bank of India, April 2008) as follows: The rationale for establishing currency futures market is diverse. Both residents and non-residents purchase domestic currency assets. If the exchange rate remains unchanged from the time of purchase of the asset to its sale, no gains and losses are made out of currency exposures. But if domestic currency depreciates (appreciates) against the foreign currency, the exposure would result in gain (loss) for residents purchasing foreign assets and loss (gain) for non residents purchasing domestic assets. In this backdrop, unpredicted movements in exchange rates expose investors to currency risks. Currency futures enable these companies to hedge their risks. Nominal exchange rates are often random walks with or without drift, while real exchange rates over long run are mean reverting. As such, it is possible that over a long run, the incentive to hedge currency risk may not be large. However, financial planning horizon is much smaller in the long-run, which is typically inter generational in the context of exchange rates. As such, there is a strong need to hedge currency risk and this need has grown diversely with fast growth in cross-border trade and investment flows. The argument for hedging currency risks appear to be natural in case of assets and applies equally to trade in goods and services, which results in income flows with leads and lags and get converted into different currencies at the market rates. Empirically, changes in exchange rate are found to have very low correlations with foreign equity and bond returns. Thus theoretically it should have low portfolio risk. Therefore, sometimes it is argued against the need of hedging currency risks but there is strong empirical evidence to suggest that hedging reduces the volatility of returns and indeed considering the episodic nature of currency returns. There are strong arguments to use instruments to hedge currency risks. Chronological sequence of derivatives in India Date Progress 14 December 1995 NSE asked SEBI for permission to trade index futures. 18 November 1996 SEBI setup L. C. Gupta Committee to draft a policy framework for index futures 11 May 1998 L. C. Gupta Committee submitted report. 7 July 1999 RBI permitted OTC forward rate agreements (FRAs) and interest rate swaps 24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian index. 25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading. 9 June 2000 Trading of BSE Sensex futures commenced at BSE. 12 June 2000 Trading of Nifty futures commenced at NSE. 31 August 2000 Trading of futures and options on Nifty to commence at SIMEX June 2001 Trading of Equity Index Options at NSE July 2001 Trading of Stock Options at NSE 9 November 2002 Trading of Single Stock futures at BSE June 2003 Trading of Interest Rate Futures at NSE 13 September 2004 Weekly Options at BSE 1 January 2008 Tra ding of Chhota(Mini) Sensex at BSE 1 January 2008 Trading of Mini Index Futures Options at NSE 6 August 2008 Circulars regarding Currency Futures by RBI SEBI 29 August 2008 Trading of Currency Futures at NSE 2 October 2008 Trading of Currency Futures at BSE 7 October 2008 MCX-SX came into existence with USD/INR pair 16 June 2010 The all new United Stock Exchange started mock trading in Currency Futures. Chapter 2 WHAT IS DERIVATIVES? Derivative is a product whose value is derived from the value of one or more basic variables, called bases (i.e. underlying asset, index, or reference rate), in a contracted manner. The underlying asset can be in the form of equity, foreign exchange, commodity or any other asset having commercial value. For example, a cotton farmer may wish to sell his harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of cotton which is the underlying. In the Indian context the Securities Contracts (Regulation) Act, 1956 [SC(R)A] defines Derivative to include- 1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2. A contract which derives its value from the prices, or index of prices, of underlying securities. The Underlying Securities f or Derivatives are : Commodities: Castor seed, Grain, Pepper, Potatoes, etc. Precious Metal: Gold, Silver Short Term Debt Securities: Treasury Bills Interest Rates Common shares/stock Currency derivatives TYPES OF FINANCIAL DERIVATIVES Derivative instruments can be classified between commodity derivatives and financial derivatives. The basic difference between these is the nature of the underlying instrument assets. In commodity derivatives the underlying instrument is commodity which may be wheat, tea, cotton, pepper, sugar, jute, turmeric, corn, crude oil, natural gas etc. In financial derivatives the underlying instruments are treasury bills, stocks, bonds, foreign exchange, stock index etc. It may be noted that financial derivative is fairly standard and there are no quality issues whereas in commodity derivative, the quality may be the underlying matters. TRADING OF FINANCIAL DERIVATIVES Derivatives traded at exchanges are standardized contracts having standard delivery dates and trading units. OTC derivatives are customized contracts which enable parties to select trading units and delivery dates to suit their requirements. Major difference between the two is that of counterparty risk i.e. risk of default by either party. With the exchange traded derivatives, the risk is controlled by exchanges through clearing house which act as a contractual intermediary and impose margin requirement. In contrast, OTC derivatives signify greater liability. DEFINITIONS Futures: Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain agreed price. Futures contracts are special types of forward contracts in the sense that they are standardized and are generally traded on an exchange. A currency futures contract provides a simultaneous right and obligation to buy and sell a particular currency at a specified future date, a specified price and a standard quantity. Forwards: Forward contract is a customized contract between two parties, where settlement takes place on a specific date in the future at todays pre-agreed price. The exchange rate is fixed at the time the contract is entered into. The basic objective of a forward market is to fix a price for a contract to be carried through on the future agreed date and is intended to free both the purchaser and the seller from any risk of loss which might incur due to fluctuations in the price of underlying asset. Swaps: Swaps are agr eements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The currency swap entails swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. There are a various types of currency swaps like as fixed-to-fixed currency swap, floating to floating swap, fixed to floating currency swap. In a swap normally three basic steps are involved Initial exchange of principal amount Ongoing exchange of interest Re exchange of principal amount on maturity. Options: Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. In other words, a foreign currency option is a contract for future delivery of a specified currency in exchange for another in which buyer of the option has to right to buy (call) or sell (put) a particular currency at an agreed price within specified period. In India only currency forwards and currency futures are only allowed. Currency swaps and currency option is yet not allowed in India. Recently MCX-SX has started to offer currency futures contracts in US Dollar-Indian Rupee (USD-INR,) Euro-Indian Rupee (EUR-INR), Pound Sterling-Indian Rupee (GBP-INR) and Japanese Yen-Indian Rupee (JPY-INR). Clearing and Settlement is conducted through the MCX Stock Exchange Clearing Corporation Ltd (MCX-SX CCL). SEBI is also considering about launching Currency Options for facilitating all the investors, exporters, importers and MNCs. CURRENCY FORWARDS MARKETS Forward contracts are agreements to exchange currencies at an agreed rate on a specified future date. The actual settlement date is after two working days after the deal date. The agreed rate is called forward rate and the difference between the spot rate and the forward rate is called as forward margin. Forward contracts are bilateral contracts and are privately negotiated, traded outside a regulated stock exchange and suffer from counter -party risks and liquidity risks. Counter Party risk means that one party in the contract may default on fulfilling its obligations thereby causing loss to the other party. An important segment of the Forex derivatives market in India is the Rupee forward contracts market. This has been growing rapidly with increasing participation from companies, exporters, importers, banks and FIIs. Till February 1992, forward contracts were permitted only against trade related exposures and these contracts could not be cancelled except where the underlying transactions failed to materialize. In March 1992, unrestricted booking and cancellation of forward contracts for all genuine exposures, whether trade related or not, were permitted to provide operational freedom to corporate entities. During the Asian crisis, freedom to re-book cancelled contracts was suspended, which has been since relaxed for the exporters but the restriction still remains for the importers. THE FUTURE MARKET Futures is a standardized forward contract to buy (long) or sell (short) the underlying asset at a specified price at a specified future date through a specified exchange. Futures contracts are traded on exchanges working as buyers or sellers for the counterparty. Exchange sets the standardized terms in term of quality, quantity, price quotation, date and delivery place (only in case of commodity). Features: The features of a futures contract may be specified as follows: These are traded on an organized exchange like NSE, BSE, MCX etc. These involve standardized contract terms viz. the underlying asset, the time of maturity and the manner of maturity etc. These are associated with a clearing house to ensure smooth functioning of the market. There are margin requirements and daily settlement to act as further safeguard. These provide for supervision and monitoring of contract by a regulatory authority. Almost ninety percent future contracts are settled via cash settlement instead of actual delivery of underlying asset. Futures contracts being traded on organized exchanges impart liquidity to the transaction. The clearinghouse, being the counter party to both sides of a transaction, provides a mechanism that guarantees the honoring of the contract and ensuring very low level of default. Types: Following are the important types of financial futures contract: Stock Future or equity futures, Stock Index futures, Currency futures, and Interest Rate bearing securities like Bonds, T- Bill Futures. Chapter 3 WHAT IS CURRENCY FUTURES? A future is a standardized contract, traded on an exchange. To buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. When the underlying asset is commodity the contract is termed as Commodity Future Contract. When the underlying is an exchange rate, the contract is termed a Currency Futures Contract. Therefore, the buyer and the seller enter into a contract for an exchange rate for a specific value or delivery date. Both parties of the future contract must fulfill their obligations on the settlement date. Currency futures can be settled by delivering the obligation of the seller and buyer respectively. All settlements go through the exchange. Currency futures are a linear product, and calculating profits or losses on currency futures will be similar to calculating profits or losses on index futures. In determining profits and losses, it is essential to know both the contract size and also tick value, A tick value is the minimum trading increment or price differential at which traders are able to enter bids and offers. Tick value differ for different currency pairs. In case of USD-INR currency futures contract the tick size shall be 0.25 Paise. For example, if a trader buys a contract at Rs. 42.2500 one tick move on this contract will translate to Rs. 42.2475 or Rs. 42.2525 depending on the direction of market movement. UTILITY OF CURRENCY DERIVATIVES Traders in the foreign exchange market make numerous trades daily, buying and selling currencies while exchanging market information may be used for varied purposes: For the import and export needs of companies and individuals For direct foreign investment To profit from the short-term fluctuations in exchange rates To manage existing positions or To purchase foreign financial instruments Exchange rates are important consideration while taking international investment decisions. When an investor decides to cash out, or bring his money home, any gains could be magnified or wiped out depending on the change in the exchange rates in the interim. Changes in exchange rates can have following effects on economy: Affects the prices of imported goods Affects the overall level of price and wage inflation Influences tourism patterns May influence consumers buying decisions and investors long-term commitments. In the volatile Forex market, traders constantl y try to foretell the behavior of other market participants. By correctly anticipating opponents strategies, they can act first and beat the competition. Traders profit by purchasing currency and selling it later at a higher price, or, anticipating the market is heading down, selling at a high price and buying back at a lower price later. To predict the movements of currencies, traders often try to determine whether the currencys price reflects its fundamental value in terms of current economic conditions. Examining inflation, interest rates, and the relative strength of the countrys economy are some of the factors which help them make a determination. Currency-based derivatives are used mainly by exporters invoicing receivables in foreign currency who are willing to protect their earnings from the foreign currency depreciation by locking the currency conversion rate at a high level. Importers use these derivatives in hedging foreign currency payables. It is effective wh en the payment currency is expected to appreciate and the importers would like to guarantee a lower conversion rate. Investors in foreign currency denominated securities like to secure strong foreign earnings by obtaining the right to sell foreign currency at a high conversion rate, thus defending their revenue from the foreign currency depreciation. Multinational companies use currency derivatives in direct investments overseas. They want to guarantee the rate of purchasing foreign currency for various payments related to the installation of a foreign branch or subsidiary, or to a joint venture with a foreign partner. High degree of volatility of exchange rates creates an opportunity for foreign exchange speculators. Their objective is to ensure a high selling rate of foreign currency by obtaining a derivative contract while expecting to buy the currency at a low rate in the future. Alternatively, they may want to obtain a foreign currency forward buying contract, expectin g to sell the appreciating currency at a high future rate. In either case, they are exposed to the currency fluctuations risk in the future betting on the pattern of the spot exchange rate adjustment consistent with their initial expectations. Most commonly used instrument among the currency derivatives are currency forward contracts. These are large notional value selling or buying contracts obtained by exporters, importers, investors and speculators from banks with denomination normally exceeding 2 million USD. Contracts guarantee the future conversion rate between two currencies and can be obtained for any customized amount and any date in the future. They normally do not require a security deposit since their purchasers are mostly large business firms and investment institutions, although the banks may require compensating deposit balances or lines of credit. Their transaction costs are set by spread between banks buy and sell prices. Currency futures provide an additio nal tool for hedging currency risk by. Further development of domestic foreign exchange market. Permit trades other than hedges with a view to moving gradually towards fuller capital account convertibility. Provide a platform to retail segment of the market to ensure broad based participation based on equal treatment. Efficient method of credit risk transfer through the Exchange. Create a market to facilitate large volume transactions to go through on an anonymous basis without distorting the levels. PARTICIPANTS OF CURRENCY MARKET Hedgers: They use derivatives markets to reduce or eliminate the risk associated with price of an asset. Majority of the participants in derivatives market belongs to this category. Speculators: They transact futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Arbitrageurs: Their behavior is guided by the desire to take advantage of a discrepancy between prices of more or less the same assets or competing assets in different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. BASE CURRENCY TERMS CURRENCY In foreign exchange markets, base currency is the first currency in a currency pair and second currency is called as the terms currency. Exchange rates are quoted in per unit of the base currency. That is the expression Dollar-Rupee, tells that the Dollar is being quoted in terms of the Rupee. Dollar is the base currency and the Rupee is the terms currency. Exchange rates are constantly changing, which means that the value of one currency in terms of the other is constantly in flux. Changes in rates are expressed as strengthening or weakening of one currency vis-à  -vis the second currency. Changes are also expressed as appreciation or depreciation of one currency in terms of the second currency. Whenever the base currency buys more of the terms currency, the base currency is said to have been strengthened / appreciated and the terms currency has weakened / depreciated. Chapter 4 EXCHANGE TRADED CURRENCY FUTURES Future markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in future at a certain price. Unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in futures contracts, exchange specifies certain standard features of the contract. A futures contract is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered (or can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity entering into an equal and opposite transaction. NEED FOR EXCHANGE TRADED CURRENCY FUTURES Exchange traded futures as compared to OTC forwards serve the same economic purpose yet differ in fundamental ways. An individual entering into a forward contract agrees to transect at a forward price on a future date. On the maturity date, the obligation of the individual equals to the forward price at which the contract was executed. Except on the maturity date no money changes hands. On the other hand in case of exchange traded currency futures contract mark to market obligation is settled on a daily basis. Since the profit or loss in a future market are collected/ paid on a daily basis, the scope of building mark to market loss in the books of various participants gets limited. Counterparty risk in future contract is further eliminated by the presence of a clearing corporation, which by assuming counterparty guarantee eliminates credit risk. Further in an exchange traded scenario where the market lot is fixed at a much lesser size than the OTC market, equitable opportunit y is provided to all the classes of investors whether large or small to participate in the future market. The transaction on an exchange are executed on a price time priority ensuring that the best price is available to all categories of market participant irrespective of their size. Other advantages of an exchange traded market would be greater transparency, efficiency and accessibility. FUTURES TERMINOLOGY Spot price: The price at which an asset trades in the spot market. In the case of USD/INR, spot value is T + 2. Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. Currency futures contracts on the SEBI recognized exchanges have one-month, two-month, and three-month up to twelve-month expiry cycles. Hence, these exchanges will have 12 contracts outstanding at any given point in time. Value Date/Final Settlement Date: The last business day of the month will be termed the Value date/ Final Settlement date of each contract. Last business day would be taken to the same as that for Inter-bank Settlements in Mumbai. The rules for Inter-bank Settlements, including those for known holidays and subsequently declared holiday would be those as laid down by Foreign Exchange Dealers Association of India (FEDAI). Expiry date: It is the date specified in the futures contract. All contracts expire on the last working day (excluding Saturdays) of the contract months. The last day for the trading of the contract shall be two working days prior to the final settlement date or value date. Contract size: The amount of assets that have to be delivered under a contract, which is also called as lot size. In the case of USD/INR it is USD 1000; EUR/INR it is EUR 1000; GBP/INR it is GBP 1000 and in case of JPY/INR it is JPY 100,000. Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures (in commodity markets) the storage cost plus the interest that is paid to finance or carry the asset till deliver y less the income earned on the asset. For equity derivatives carry cost is the rate of interest. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing price. This is called marking-to-market. CONTRACT SPECIFICATION DETAILS OF CONTRACT SPECIFICATION OF USD/INR FUTURES Symbol USDINR Instrument Type FUTCUR Unit of trading 1 (1 unit denotes 1000 USD) Underlying The exchange rate in Indian Rupees for a US Dollar Tick size Rs.0.25 paise or INR 0.0025 Trading hours Monday to Friday 9:00 a.m. to 5:00 p.m Contract trading cycle 12 month trading cycle. Last trading day Two working days prior to the last business day of the expiry month at 12 noon. Final settlement day Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. Quantity Freeze Above 10,000 Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contract Price operating range Tenure up to 6 months Tenure more than 6 months +- 3% of base price +- 5% of base price Position limits Clients Trading members Banks Higher of 6% of Higher of 15% Higher of total open interest of the total open 15% of total or USD 10 million interest or open interest USD 50 million or USD 100 Million Minimum initial margin 1.75% on day 1, 1% thereafter Extreme loss margin 1% of MTM value of open position. Calendar spreads Minimum Rs. 250/- per contract for all months of spread Settlement Daily settlement : T + 1 Final settlement : T + 2 Mode of settlement Cash settled in Indian Rupees Daily settlement price (DSP) Calculated on the basis of the last half an hour weighted average price Final settlement price (FSP) RBI reference rate NSE trades Currency Derivatives contracts having near 12 calendar month expiry cycles. All contracts expire two working days prior to the last working day of every calendar month (subject to holiday calendars). This is also the last trading day for the expiring contract. The contract would cease to trade at 12:00 noon on the last trading day. A new contract with 12th month expiry would be introduced immediately ensuring availability of 12 monthly contracts for trading at any point. The Instrument type: FUTCUR refers to Futures contract on currency and Contract symbol: USDINR denotes a currency pair of US Dollars Indian Rupee. Each futures contract has a separate limit order book. All passive orders are stacked in the system in terms of price-time priority and trades take place at the passive order price (order which has come earlier and residing in the system). The best buy order for a given futures contract will be the order to buy at the highest price wh ereas the best sell order will be the order to sell at the lowest price. TRANSACTION OF A CONTRACT FACTS FIGURES ABOUT USD/INR FUTURES CONTRACT Trade Date Total Contracts Total Value Spread Volume Open Interest RBI Reference Rate (in Rs. Cr.) 19-Nov-08 179362 895.68 64676 49.74 01-Dec-08 192221 970.1 71325 50.09 01-Jan-09 97289 474.66 133015 48.73 01-Dec-09 1845073 8571.3 221069 580426 46.45 01-Jan-10 948881 4437.47 250133 468156 46.65 29-Jan-10 2919761 13557.42 421800 595355 46.37 17-June-2010 36,85,770 17049.6 1276594 46.16 Chapter 5 EXAMPLES OF HEDGING 1). Suppose a machinery importer wants to import machinery worth USD 100,000 and places his import order on June 12, 2010, with the delivery date being 4 months ahead. At the time of placing the contract one USD is worth Rs 46.50 in the spot market. But, suppose the Indian Rupee depreciates to INR 46.75 per USD when the payment is due in October 2010, the value of the payment for the importer goes up to Rs 4,675,000, rather than Rs 4,650,000. The hedging strategy for the importer, thus, would be: Current Spot Rate (12th June 10) 46.5000 Buy 100 USD INR Oct 10 Contracts on 12th June 10 (1000 * 46.5500) * 100 (Assuming the Oct 10 contract is trading at 46.5500 on 12th June, 10) Sell 100 USD INR Oct 10 Contracts in Oct 10 Profit/Loss (futures market) 46.7500 1000 * (46.75 46.55) * 100 = 20,000 Purchases in spot market @ 46.75 Total cost of hedged transaction 46.75 * 100,000 100,000 * 46.75 20,000 = Rs 4,655,000 2). A garment exporter of Ludhiana, w ho is exporting Garments worth USD 100,000, wants protection against possible Indian Rupee appreciation in Dec 10, i.e. when he receives his payment. He wants to lock-in the exchange rate for the above transaction. His strategy would be: One USD INR contract size USD 1,000 Sell 100 USD INR Dec 10 Contracts (on 12th June 10) 47.2925 Buy 100 USD INR Dec 10 Contracts in Dec 10 47.1025 Sell USD 100,000 in spot market @ 47.1025 in Dec 10 (Assume that initially Indian rupee depreciated , but later appreciated to 47.1025 per USD as foreseen by the exporter by end of Dec 10) Profit/Loss from futures (Dec 10 contract) 100 * 1000 *(47.2925 47.1025) = 0.19 *100 * 1000 = Rs 19,000  The net receipt in INR for the hedged transaction would be: 100,000 *47.1025 + 19,000 = 2,355,125 + 19,000 = Rs 2,374,125. Had he not participated in futures market, he would have got only Rs 2,355,125. Thus, he kept his sales unexposed to foreign exchange rate risk. 3). Suppose an Indian exporter receives an export order worth 100,000 from a European customer with the delivery date being in 3 months time. At the time of placing the contract, the Euro is worth Rs 56.05 in the spot market, while a futures contract for an expiry date that matches with order payment date is trading at Rs 56. This puts the value of the order, when placed, at Rs 5,605,000. However, if the domestic exchange rate appreciates significantly (to Rs 55.20) when the order is paid for (which is one month after the delivery date), the firm would receive only Rs 5,520,000 rather than Rs 5,605,000. To insure against such losses, the firm can, at the time it receives the order, can enter into 100 Euro futures contract of 1000 each to sell at Rs 56 a Euro, which involves contracting to sell a foreign currency on expiry date at the agreed exchange rate. Suppose on payment date the exchange rate is Rs 55.20, the exporter would receives only Rs 5,520,000 on selling the Euro in the spot market, but gains Rs 80,000 (i.e. 56 55.20 * 100 * 1000) in the futures market. Thus, overall the firm receives Rs 5,600,000 and protects itself from the sharp appreciation of domestic currency against Euro. 4). A dealer in India placed an import order worth 100,000 with a German manufacturer. The current spot rate of the Euro is Rs 56.05 and at this rate the value of the order is Rs 5,605,000. The importer is concerned about sharp depreciation of the Indian Rupee against the Euro in coming months when the payment is due. So, the importer buys 100 Euro futures contract (1000 each) at Rs 56 a Euro. Suppose, at expiry date, the Rupee depreciated to Rs 57, the importer would have to pay Rs 5,700,000, but he would gain Rs 100,000 (i.e. Rs.67 56 * 100 * 1000) from the futures market and the resultant outflow would be only Rs 5,600,000. In the short term, firms can make gains or losses from hedging. But the basic purpose of hedging is to protect against excessive losses. Firms also tend to benefit from knowing exactly how much they will pay for the import order and avoid the uncertainty associated with future exchange rate movements. ADVANTAGES OF CURRENCY FUTURES Low Commissions: A highly competitive market keeps a tab on brokerage, keeping fees to bare minimum. No Middlemen: Futures/Options currency trading allows clients to trade directly on the exchange platform. Standardized Lot Size: Lots or contract sizes are determined and fixed by the exchanges. Low Transaction Cost: The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. Almost Instantaneous Transactions: High liquidity and low bid/ask spreads lead to immediate trades. Affordability: Margins are very low and the contract size is very small. As per the specification of NSE, USD-INR currency future contract, lot size is 1000$. Margin is 1.75%. Low Margins, High Leverage: Margins of 3-5% increase leverage possibilities. These 2 factors increase the potential for making higher profits (and losses). Online Access: The advent of online (Internet) trading platforms helps you to trade at your convenience from your home, office or on the go. No one can corner the market: The Forex market is so vast and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. Even interventions by mighty central banks are becoming increasingly ineffectual and short-lived. Thus central banks are becoming less and less inclined to intervene to manipulate market prices. Transparency: It is possible for everyone to verify trade details on NSE if anyone have a doubt that the broker has tried to cheat. DISADVANTAGES OF FUTURES The futures are also disadvantageous in a few areas when compared to OTC market. The major disadvantages are: Standardization: It is not possible to obtain a perfect hedge in terms of amount and timing. Cost: Forwards have no upfront cost, while margining requirements may effectively drive the cost of hedging in futures up. Small lots: Generally it is not possible to hedge small exposures. Chapter 6 CONCLUSION Most significant event in the field of finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it a process that has undoubtedly improved national productivity growth and standards of livings. Currency futures provide the safe and standardized contract to its investors and individuals who are aware about the forex market or predict the movement of exchange rate so they will get the right platform for the trading in currency future. Because of exchange traded future contract and its standardized nature gives counter party risk minimization. Initially only NSE had the permission but now BSE MCX-SX has also started currency future contracts. It shows that how currency future covers ground in the compare of the other available derivative instruments. Last month MCX-SX ranked top amongst all three with m ore than 50% trades of currency futures contracts in India in sense of volumes and number of contracts also. Not only big business houses, exporters and importers use this but individuals who are interested and having knowledge about forex market they can also invest in currency future. Exchange between USD-INR markets in India is very big and along with it other currency contracts of Euro, Pound and Japanese Yen are in the market and attracting the investors which is the reason behind higher growth rate of currency futures in India. I am extremely thankful to Dr H K Pradhan for providing with an opportunity to this very insightful study which has helped understand International Finance Management better. Chapter 7