This paper shall examine several major areas of information. I shall discuss international currency exchanges briefly, as a background for the financial risk management tools, which apply to currency exchanges, and to a growing and significant series of assets and conditions. I will briefly touch on the analytic tools which at the least will allow the portfolio manager to create a customized model of valuation parameters for the risk management, though the depth of the statistical analysis is limited by the length of this paper.

Currency is the mobile transferable medium of exchange which converts barter into trade. International trade is complicated by the many different currencies which numerous political entities have created, in an effort to consolidate their own influence. Businessmen must price their trade goods to gain a share in a competitive market and to make a profit, while not gambling on currency fluctuations, due to varying supplies and demands for each currency type. The speculator may find the risky open position appealing but the rational businessman seeks to reduce his risk.

What is the purpose of insurance ? One must consider risk in any comprehensive business plan. The following is a list of three different types of risk one must recognize in any business.

Pure Risk : property loss, accident liability, workman's compensation, - buy insurance to cover the planned cost and budget directly the deductible.

Strategic Risk - deregulation, technological innovation, social change, emergence of maverick competitors; no facts about the future means no data analysis can prepare for these risks.

Financial Risk : currency and other asset hedging, derivative trading, - which is a statistically calculated risk.

A business must try to cover all exposures, some of which hedging protects.

Transaction exposure - risk of currency fluctuation between buyer country and home country.

Accounting Exposure - capital assets abroad, in home country balance sheet currency.

Economic Exposure - future profits expectation valued in home country currency.

I hope to begin to describe currency hedges in this paper, and mention several other options, which have developed in response to a demand for risk management tools. If it might change and if it has a value, then one can make odds on probability that it may change values. Any equity may be "hedged" today, in increments of basis points, of which 100 makes one percentage point.

The Philadelphia Stock Exchange added options to it's set of financial products in 1982. Philadelphia created an insurance policy for currency exchanges with the financial product known as derivatives. 1993 was the heyday with $12 M in transactions, which has since shrunk to $3M in 1997, as the off-exchange transaction bypassed the exchange. (April 1998 Money p.138)

The off-exchange "over the counter" derivative is a one-on-one bargain between large sophisticated users such as investment banks. Derivatives are privately negotiated contracts whose value is tied to the market performance of bonds, commodities, currency, stocks and other assets. The value of the underlying assets are estimated to be $2.4 T and growing as of Jan. 1999. Determining the actual value of a derivative is a still-evolving financial skill.

The International Swap and Derivative Association described the growth of derivatives as from $ 685 B (1987) to $ 37 T (the figure represent the paper value of the underlying financial product used to create the derivative contract). Exposure is probably less than 1% of that. (Labaton & O'Brien, 1999).

Bargains can be had in the market, because some investors have to sell even their good equity investments, when the hard times squeeze them elsewhere. These same investors would never be squeezed hard enough to have to liquidate the long term blue chip equities in a good economy.