Future rates and the success of derivates of the firm : Case Study of Futures Contracts Sold on CME

Abstract: In today’s world economy, many companies produce where it is most cost effective to produce goods, sell where it is most profitable and source capital where it is cheaper than anywhere else, without worrying about national boundaries. However, this stage were the world has reached began three decades ago with the freeing of exchange rate, capital and interest rate controls. Additional business risks have arisen as a result of this free world and they are such that interest and exchange rates have become more variable requiring innovative financial products to help companies manage these business risks. Companies can now buy financial derivatives to help manage their exposure to variable exchange rates. As such it was the purpose of this paper to assess the effectiveness of exchange traded currency futures contracts in managing exposure to exchange rates. This was to be achieved through answering two research questions (1) how successful are exchange traded futures derivatives and (2) what is the significance of these success rates. The study established that futures contracts with maturity in three, six and nine-months have 52%, 72% and 45% success rates respectively and however only the three month success rate was confirmed by hypothesis tests.