Question

In regards to derivatives in the international market, please discuss the purpose and use of currency derivatives in international markets and who created these financial tools? Be specific and share examples of the utilization of this investment tool.

Answer 1

The purpose and use of currency derivatives are :

• Price discovery - Currency derivatives help in price discovery as they increase the volumes in the cash market and facilitate trading in currency pairs which are not available to trade in the cash market.
• Hedging - Derivatives enable risk management, risk transfer and hedging.  

These financial tools were created by various participants such as exporters, importers, speculators, arbitrageurs and financial intermediaries.

For example :

• An importer who has to make a payment in foreign currency can hedge their risk by buying forwards, futures or call options.
• An exporter who has to receive a payment in foreign currency can hedge their risk by selling forwards, futures or buying put options.