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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Understanding corporate finance: foreign exchange: managing exchange risk: currency derivatives

Currency derivatives

Large businesses often use derivatives to manage exchange risk. They may make forward purchases of currency, or make use of currency futures, options and swaps. CFM13000 explains more about how companies use these sorts of derivative.

The majority of companies that undertake transactions on the spot market, or who participate in the futures, options or swaps markets, do so because they need foreign currency for their trade, or because they want to hedge exchange risks. But companies may also buy and sell currencies or derivative contracts speculatively - they hope to make a profit from anticipated changes in exchange rates.

The biggest speculators are clearing and investment banks, many of which engage in proprietary trading using their own (as opposed to their customers’) money. But other large multinational groups frequently engage in speculative activity, often very successfully. Indeed, the treasury departments of the largest groups operate in a very similar way to banks.