FOREIGN EXCHANGE

DERIVATIVES
Definition:

Any financial instrument that locks in

a future foreign exchange rate. These
can be used by currency or forex
traders, as well as large multinational
corporations. Financial instruments
that fall into this category include:
currency options contracts, currency
swaps, forward contracts and futures
contracts
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Foreign exchange option.

Forex swap

Currency future

Currency swap

Foreign exchange hedge
CURRENCY FUTURE
A currency future, also FX future or foreign
exchange future, is a futures contract to exchange
one currency for another at a specified date in the
future at a price (exchange rate) that is fixed on the
purchase date; see Foreign exchange derivative.
Typically, one of the currencies is the US dollar. The
price of a future is then in terms of US dollars per unit
of other currency. This can be different from the
standard way of quoting in the spot foreign exchange
markets The trade unit of each contract is then a
certain amount of other currency, for instance
€125,000.
CURRENCY SWAP
A currency swap is a foreign-exchange
agreement between two parties to exchange
aspects (namely the principal and/or interest
payments) of a loan in one currency for
equivalent aspects of an equal in net present
value loan in another currency.
CONTD…
The most simple currency swap structure
is to exchange the principal only with the
counterparty, at a rate agreed now, at
some specified point in the future. Such
an agreement performs a function
equivalent to a forward contract or
futures. The cost of finding a counterparty
(either directly or through an
intermediary), and drawing up an
agreement with them, makes swaps more
expensive than alternative derivatives.
FOREX SWAP
A forex swap (or FX swap) is a simultaneous
purchase and sale of identical amounts of one
currency for another with two different value dates
(normally spot to forward).
A forex swap consists of two legs:
a spot foreign exchange transaction, and
a forward foreign exchange transaction.
These two legs are executed simultaneously for
the same quantity, and therefore offset each other.
It is also common to trade forward-forward, where
both transactions are for (different) forward dates.
FOREIGN EXCHANGE OPTION

In finance, a foreign exchange option (commonly

shortened to just FX option or currency option)
is a derivative financial instrument where the
owner has the right but not the obligation to
exchange money denominated in one currency
into another currency at a pre-agreed exchange
rate on a specified date; see Foreign exchange
derivative
HEDGE
A hedge is a type of derivative, or a Financial
instrument, that derives its value from an
underlying asset. Hedging is a way for a company
to minimize or eliminate foreign exchange risk.
Two common hedges are forwards and options. A
Forward contract will lock in an exchange rate at
which the transaction will occur in the future. An
option sets a rate at which the company may
choose to exchange currencies. If the current
exchange rate is more favorable, then the
company will not exercise this option.
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