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.