The purpose of this report is to discuss the role of currency futures in risk management as well as their main advantages and drawbacks. The report will analyse the global rate of utilization of currency futures by comparison with other main currency derivatives and the geographic differences in their usage. Possible explanations for the preference for certain currency derivatives in risk management will be given.
The usefulness of currency futures rate as an estimator of future spot rate will be discussed by reviewing and summarizing the existing literature on this subject.
Practical applications of currency futures also will be covered in this report.
Table of contents
1. Introduction
2. Literature Review
2.1 The Use of Currency Futures
2.2 Currency Futures Rate as Estimator of Spot Exchange Rate
3. Application
3.1 Trading on Currency Futures Exchanges
3.2 Hedging Foreign Exchange Risk Assuming Perfect Correlation between Spot and Futures Prices
3.3 Hedging Foreign Exchange Risk Assuming Basis Risk
3.4 Estimation of the Hedge Ratio
4. Conclusion
5. References
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