ntil very recently, commodity futures markets were largely ignored by the U vast majority of economists. At the same time, markets for foreign currencies were studied by only a relative handful of specialists in international trade and finance. This article describes an area which overlaps the two very arcane areas of commodity futures markets and foreign exchange markets, i.e., the futures market for foreign currencies.
Futures trading in financial instruments began in 1972, when foreign currency futures were listed on the International Monetary Market (IMM) division of the Chicago Mercantile Exchange. Treasury-bill (T-bill) futures began trading in January 1976, and nearly all research in financial futures markets to date has been on interest rate futures. Some impetus for studying financial futures came from the Treasury Department and the Federal Reserve Board, which expressed concern that the financial futures markets might have spillover effects which could cause disruptions of the cash markets (see TreasurylFederal Reserve Staffs, 1979).
Although currency futures are the oldest financial futures markets, it is only recently that they have become popular. The question of how effective they are for hedging is important for two reasons. First, hedgers are necessary to maintain the long-term viability of most futures markets. Second, use of these contracts by importers and exporters may ultimately result in an increase in the volume of international trade.
This article examines the hedging effectiveness of currency futures markets. In particular, the present work demonstrates that the futures markets for British pounds, German marks, and Japanese yen have been as effective as hedging devices as have some of the long-established contracts in agricultural commodity futures.