Foreign currency futures: reducing foreign exchange risk

The wide fluctuations in foreign exchange rates since the 1971 breakdown of the Bretton Woods System of fixed exchange rates have introduced a new element of risk into international transactions. The possibility of large losses has forced most corporations to turn to the forward market to limit the adverse effects of exchange rate movements. Major international banks have traditionally provided forward cover to their international customers as a means of hedging foreign exchange exposures. In recent years, however, the International Monetary Market in Chicago has emerged as a significant alternative facility for reducing foreign exchange risk by offering contracts in foreign currencies for future delivery.