| Derivatives Introduction |
| Types of Derivatives |
| Equity Derivatives |
| Credit Derivatives |
| Fixed Income |
| Interest Rate Derivatives |
| Foreign Exchange Derivatives |
FX Forwards
A currency or FX forward is a contract in which the parties agree to exchange cash flows in two different currencies at an agreed upon date in the future.
Forward Contract can be used to to hedge foreign currency risk. Suppose that on August 16,2001, the treasurer of a U.S. corportation will pay £1 million in six months (on Feburary 16,2002) and wants to hedge against the exchange rate moves. Using the quotes in Table 1.1, the treasurer can agree to buy £1 million six month exchange rate forward at exchange rate forward 1.4359. The corporation then has a long forward contract on GBP. It has agreed that on Feburary 16, 2002 it will buy £1 million from the bank for $1.4359 million. The bank has the short contract on the GBP. It has agreed on Feburary 16,2002 it will sell £1 million for $1.4359 million. Both sides have made the binding commitment.