Chapter 10

Minimizing the FX Risk: FX Derivatives

In This Chapter

arrow Defining FX derivatives

arrow Identifying who uses FX derivatives

arrow Determining the purpose of FX derivatives

arrow Spotting differences between FX derivatives

arrow Calculating gain or loss when using FX derivatives

You’re likely happy to know that this chapter isn’t about calculus! You don’t have to take the derivative of a function. Whew! In finance, a derivative implies a contract to buy or sell a financial instrument at a future date and a price specified today. Because you get the contract today to engage in a future buying or selling activity, derivatives involve betting on the future price of a financial instrument.

In international finance, derivative instruments imply contracts based on which you can purchase or sell currency at a future date. In this chapter, I explore three major types of FX derivatives: forward contracts, futures contracts, and options. They have important differences, which changes their attractiveness to ...

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