Foreign exchange derivative
Encyclopedia
A Foreign exchange
derivative
is a financial
derivative
where the underlying
is a particular currency
and/or its exchange rate
. These instruments are used either for currency speculation and arbitrage or for hedging
foreign exchange risk. For detail see:
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
derivative
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
is a financial
FINANCIAL
FINANCIAL is the weekly English-language newspaper with offices in Tbilisi, Georgia and Kiev, Ukraine. Published by Intelligence Group LLC, FINANCIAL is focused on opinion leaders and top business decision-makers; It's about world’s largest companies, investing, careers, and small business. It is...
derivative
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
where the underlying
Underlying
In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the derivative depend on the value of this underlying...
is a particular currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
and/or its exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
. These instruments are used either for currency speculation and arbitrage or for hedging
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
foreign exchange risk. For detail see:
- Foreign exchange optionForeign exchange optionIn finance, a foreign-exchange option is a derivative financial instrument that gives the owner 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.The FX options market is the deepest, largest and...
- Forex swapForex swapIn finance, a forex swap is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates .; see Foreign exchange derivative.-Structure:...
- Currency futureCurrency futureA 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 that is fixed on the purchase date; see Foreign exchange derivative. Typically, one of the currencies is the US dollar...
- Currency swapCurrency swapA currency swap is a foreign-exchange agreement between two parties to exchange aspects of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are motivated by comparative advantage...
- Foreign exchange hedgeForeign exchange hedgeA foreign exchange hedge is a method used by companies to eliminate or hedge foreign exchange risk resulting from transactions in foreign currencies . This is done using either the cash flow or the fair value method...
- Binary option: Foreign exchange