International Models with Hedging

Abstract

The first financial hedging instruments on a foreign exchange, which were in the form of currency future contracts, were introduced in 1972 by the Chicago International Monetary Market (IMM), an affiliate of the Chicago Merchandise Exchange (cf. Duffie (1989)). These instruments were introduced in response to the liberalization of foreign exchange rates, which had been kept fixed until 1971, due to the Bretton-Woods agreement in 1994 (cf. Shapiro (1992)). Since that time, market exchange rates have been determined by the corresponding supply and demand for each currency, which is in contrast to the fixed currency parities between individual currencies and the US dollar that had existed earlier (see Andersen (1993)). In 1982, the first currency options contracts, on the Canadian dollar, appeared on the Montreal Exchange, and since then different types of options with an international appeal have been successfully traded throughout Europe, North America, and Asia (see Cox and Rubinstein (1985), Andersen (1993)).