Currency Derivative Markets Landscape

Abstract

Currencies are exchanged in many different formats and through many different venues. Today's market landscape features active FX trading in the form of spot, forward, swap, futures and option transactions, on an over-the-counter (OTC) and on an exchange-traded basis. Currencies have been transacted in many different forms stretching back to ancient times and moving forward through the era of the gold standard and the fixed currency regime under the Bretton Woods Agreement. The modern era of currency trading may be said to have begun with the collapse of the Bretton Woods Accord in the early 1970s, ushering in a new regime featuring floating exchange rates. Currency traders have been quite inventive in developing new and increasingly specialized mechanisms to address the risks attendant to floating exchange rates in a risky economic environment. Spot trading of currencies has been supplemented by outright forward contracts, FX swaps, currency swaps and options. Chicago Mercantile Exchange (CME) introduced currency futures in 1972 followed in 1984 by the introduction of options on currency futures. These instruments have grown in popularity at an accelerating rate over recent years as a result of volatility, globalization and widespread acceptance of electronic trading platforms. In particular, the popularity of futures and options on futures is growing rapidly as traders learn to appreciate the liquidity, transparency, rapid execution, anonymity and clearinghouse guarantees associated with the trade of these instruments on CME.