The Forward Foreign Exchange Market

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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 has been even more spectacular than the tremendous growth seen in the entire foreign exchange market over the past decade or so.

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