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Recent Developments in International Currency Derivatives Market: Implications for Poland


  • Lucjan T. Orlowski

    (Sacred Heart University)


This paper examines currency derivatives that have emerged in international financial markets over the past two years, emphasizing the departures of spot exchange rate movements from the macroeconomic fundamentals among the “triad” currencies: the U.S. Dollar (USD), the German Mark (DM), and the Japanese Yen (YE). Sensitivity of exchange rates to key macroeconomic variables (differentials in interest rates, income and inflation) is tested for the “triad” currencies in two periods: 1991-1993 and 1994-1995. In the latter period, some considerable misalignments between forward rates and changes in spot exchange rates are observed. This is contrary to the historical evidence of the validity of the so-called “unbiased forward rate hypothesis” claiming that forward rates are the best predictor of adjustments of spot rates (Levich, 1976). It is argued that the recently observed failure of the relationship between forward rates and lagged spot rates has contributed to significant losses of investors and speculators in international currency derivative markets. The examination of these relationships and the recent empirical developments provides useful lessons for the transition economies of Central and Eastern Europe in their attempts to construct viable modern financial markets. This study limits the scope of recommendations for developing financial markets to the conditions of Poland. It assumes that currency-based derivative transactions may play a pivotal role in reducing systemic risk of external trade and financial contracts in the Polish economy presently undergoing considerable structural adjustments aimed at promoting export and net capital inflows. It further argues that an introduction of financial derivatives in Poland shall be preceded by a construction of sound underlying security markets. A stable currency accompanied by low inflation is necessary prerequisites for a successful functioning of currency-based derivatives.

Suggested Citation

  • Lucjan T. Orlowski, 2005. "Recent Developments in International Currency Derivatives Market: Implications for Poland," International Finance 0502008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0502008
    Note: Type of Document - pdf; pages: 24. Revised version subsequently published as 'Recent developments in international currency derivatives', Chapter 12 in Brzezinski, Horst and Michael Fritsch, 'The Emergence and Evolution of Markets', E. Elgar, 1997, pp. 194-216

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    References listed on IDEAS

    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    2. Andrew K. Rose, 1994. "Are exchange rates macroeconomic phenomena?," Economic Review, Federal Reserve Bank of San Francisco, pages 19-30.
    3. Jane Marrinan, 1989. "Exchange rate determination: sorting out theory and evidence," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 39-52.
    4. Lucjan T. Orlowski, 1995. "Preparations of the Visegrad Group countries for admission to the European Union: monetary policy aspects," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(3), pages 333-353, September.
    5. Levich, Richard M., 1985. "Empirical studies of exchange rates: Price behavior, rate determination and market efficiency," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 19, pages 979-1040, Elsevier.
    6. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    7. Steven A. Symansky & Peter B. Clark & Leonardo Bartolini & Tamim Bayoumi, 1994. "Exchange Rates and Economic Fundamentals; A Framework for Analysis," IMF Occasional Papers 115, International Monetary Fund.
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    Cited by:

    1. Ibañéz, Francisco & Romero-Meza, Rafael & Coronado-Ramírez, Semei & Venegas-Martínez, Francisco, 2016. "Innovaciones financieras en América Latina:Mercado de Derivados y Determinates de la Administración de Riesgo," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(22), pages 7-38, Primer se.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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