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    Why are Future/Option contracts necessary if Forwards exist?

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    Given that the forward market already existed, why was it necessary to establish currency futures and currency options contracts?

    Please discuss in detail and provide at least 2 references for your answer.

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    Solution Preview

    Futures and forwards operate very differently and serve very different clientele. In general, a forward market serves customers that require transfer of a commodity-in this case, currencies. A forward contract hedges exchange rate risk, locks in favorable rates, etc... the bottom line is that a forward contract exists to transfer the good-not to speculate on values. Options and futures, however, focus on the fluctuation of the underlying commodity-and are specifically designed to capture a liquid method for trading these values.

    Closing a futures position refers to the (very common) practice of taking an equal and opposite position in order to avoid having to take or make delivery of the commodity in question.

    "For example, speculators who purchased Treasury bond futures contracts could sell similar ...

    Solution Summary

    500 words, APA format with references.