The move to floating exchange rates has resulted in an increase in the volatility of exchange rates and greater randomness in their movements. The experience in Australia has mirrored that overseas. Forecasting exchange rate movements has become a perilous occupation, and both official forecasts, such as forward rates, and private forecasts have not performed well.
Companies engaged in international trade and investment are vulnerable to exchange rate movements and must therefore take steps to cover or hedge their foreign exchange exposure. This thesis aims to compare and contrast the instruments available to cover foreign exchange exposure in the forward and futures markets.
Forward contracts, futures contracts and options each have characteristics that make them attractive to hedgers and speculators depending on their needs and resources. The three instruments are not generally in competition, but rather act to complement each other. The number of different strategies available to cover exposure is impressive. It may be this very fact that deters potential hedgers, particularly smaller firms, from using the forward and futures markets to their best advantage. The complexity and cost of arranging and monitoring cover may be beyond their resources.