A Currency Options Primer
Chapter One
Introduction
Since the breakdown of the Bretton Woods agreement in the early 1970s, currencies of the
major industrial nations have fluctuated widely in response to trade imbalances, interest rates,
commodity prices, war and political uncertainty. In recent years, the pressure of governments
maintaining currency parity has led to the breakdown of quite a few exchange rate mechanisms
and has, thus, reinforced the need for companies, in particular, to take active foreign exchange
hedging decisions in order to prevent the erosion of profit margins.
1.1 THE FORWARD FOREIGN EXCHANGE MARKET
The forward foreign exchange market developed to assist companies protect themselves from
some of the uncertainty of exchange rate movements, but foreign exchange forwards are truly
appropriate for known exposures. Using them to cover contingent, variable or translation
exposures could force a company to accept losses on unnecessary currency transactions. Not
only that, but rival companies that leave their exposure unhedged may suddenly acquire a
competitive advantage. This has, therefore, partially led to the expansion in the currency
options market, which h ... read full excerpt from A Currency Options Primer ebook
