Abstract
This paper documents the impact of the introduction of foreign currency options and options on foreign currency futures on the underlying securities. We find that the volatility of exchange rates decreases following the listing of options for a majority of the currencies under consideration. In addition, we find that trading volume and open interest in currency futures increases after option introduction. This evidence is consistent with the notion that derivative securities are important innovations for stabilizing and increasing liquidity in the market for the underlying assets.
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