Foreign exchange transactions can be traced back to the fourteenth Century in the UK, but the coming into being and development of foreign exchange derivatives market was in the 1970s with the historical background and economic environment. Firstly, after the collapse of the Bretton Woods system, in forward exchange rates investopedia forex, IMF held a meeting in Jamaica and reached the Jamaica agreement.
The end of contract mostly adopt the settlement for differences. At the same time, the buyers need not to present full payment only when the physical delivery gets performed on the maturity date. Therefore, the characters of trading financial derivatives include the lever effect. Avoiding and managing systemically financial risk. Increasing financial systems’ ability to resist risk.
Financial derivatives, which contain functions on avoiding and shifting risk, can transfer the risk to the individuals with more risk tolerance. The process turns financial risk that would be mighty impact for weak-risk-tolerance companies to withstand into small or intermediate impact for powerful enterprises, while some might turn into speculators’ chances to make profit. It mainly refers to raise the efficiency of business running and financial market. The former is embodied as providing business with tools to prevent the risk of finance, reducing the founding cost and increasing economic benefits. Margin needs to make corresponding adjustment on time according to the price of contract. Foreign exchange derivatives can allow investors to engage in risk avoidance to keep value, but also can earn profit through speculation.