This paper examines the role of currency futures contracts in risk management. The reader can find a brief introduction to the history of foreign exchange markets and under which cir-cumstances the markets appeared in 1970s. Furthermore, the question of why to use currency futures to hedge risk exposures is answered. A more in-depth analysis of how currency futures contracts are structured, especially their specifications and their advantages and limi-tations for the user. Moreover this paper addresses issue of how currency futures are used by participants. Finally, a brief use of currency futures is also examined with a case study on the FX-market.
Table of contents
Executive Summary
Table of contents
List of figures
1. Introduction
2. Literature Review
2.1 Why to hedge with Currency Futures?
2.2 Currency Futures Outline and Scope
3. Application
3.1 Hedging with Currency Futures
3.2 Currency Futures: Case Studies
4. Conclusion
References
Appendices
Frequently Asked Questions
What are currency futures?
Currency futures are transferable futures contracts that specify the price, in one currency, at which another currency can be bought or sold at a future date.
How are currency futures used in risk management?
They are primarily used for hedging, allowing businesses and investors to lock in exchange rates and protect themselves against adverse movements in foreign exchange markets.
What is the history of foreign exchange markets?
Modern foreign exchange markets as we know them emerged in the 1970s following the collapse of the Bretton Woods system and the move toward floating exchange rates.
What are the advantages of using currency futures?
Advantages include high liquidity, standardized contract sizes, and the elimination of counterparty risk through the use of an exchange clearinghouse.
What are the limitations of currency futures?
Limitations include the requirement for margin payments (daily marking-to-market) and the fact that standardized contracts may not perfectly match the specific needs of a hedger.
Who are the main participants in the currency futures market?
Participants include hedgers (like multinational corporations), speculators seeking profit from price changes, and arbitrageurs who exploit price differences between markets.
- Quote paper
- Panagiotis Papadopoulos (Author), 2011, Role of Currency Futures in Risk Management, Munich, GRIN Verlag, https://www.grin.com/document/170203
