Multinational Finance, 6th Edition

Chapter 5Currency Futures and Futures Markets

The best thing about the future is that it comes only one day at a time.

— Abraham Lincoln

Currency futures are similar to forwards in that each represents an exposure to exchange rates around a predetermined date and price. Whereas forwards are traded in an interbank market and are customized to fit the needs of each client, futures trade on financial exchanges and are standardized as to currencies, transaction amounts, and expiration dates. Although standardization promotes liquidity, it comes at the price of flexibility. For a corporate treasurer, the choice of a forward or futures contract depends on their relative cost and flexibility.

Exchange-traded financial futures contracts are a major force in international markets. Banks and corporations use these markets to hedge their exposures to financial price risks. If an exposure can be approximately matched by an exchange-traded currency futures contract, futures can be a low-cost substitute for a customized forward contract from a commercial bank.

5.1 The Evolution of Futures Markets

Forward markets for agricultural products and commodities, such as wheat and gold, have been around as long as recorded history. Futures contracts are a relative newcomer, first appearing in Europe as the lettre de faire in medieval times. Organized commodity futures exchanges grew up somewhat later. One of the first known futures exchanges serviced the rice market at Osaka, Japan, in the early ...