Forwards, Futures, Swaps, and Options: Counterparty Risk

This chapter provides an introduction to some of the widely used financial derivative contracts: forwards, financial futures, swaps, and options. A complete analysis of these instruments requires and has been the subject of complete books.1 The objective here is to focus on the economics of these off-balance-sheet derivative contracts, that is, to understand what services they provide and to highlight the risks associated with them. A discussion of counterparty risk follows.


For many years, banks have used forward contracts to hedge risk or to take positions. A forward ...

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