Operating around the clock and with an estimated turnover of approximately USD 3.2 trillion a day, the foreign exchange market is by far the largest and most liquid in the world. Quoted prices change as often as 20 times a minute, and it has been estimated that the world’s most active exchange rates can change up to 18,000 times during a single day.
Trading in currency derivatives began on the organised exchanges of Chicago during the 1970’s, the same decade in which Fischer Black and Myron Scholes first published their model for determining the price of an option. Despite giant strides in the 1970’s, it was not until the 1980’s that corporations and financial institutions really began to use derivatives to hedge and in certain cases speculate on foreign exchange rate risk. The rapid increase in demand in the 1980’s was followed by a structural change during the 1990’s that saw the bulk of currency options trading move away from organised exchanges towards the dealing rooms of large investment banks. This move facilitated massive growth in the OTC currency options market thereafter and since 1995 the currency options market has grown on average by almost 40% per year. Today the average daily turnover is well over USD 100 billion.
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