Chapter 4

Forward-Looking Market Instruments

Abstract

Foreign currency liabilities of firms are due in the future, resulting in a currency exchange risk. This chapter describes hedging instruments that limit or remove the currency risk. Forward markets, futures markets, and options markets are defined and compared. An example of each type of basic hedging instrument is provided to make it easier for students to understand the similarities and differences for each instrument. In addition, a detailed discussion of different swaps markets is included in the chapter.

Keywords

Forward markets; forward premium; forward discount; currency futures; foreign exchange swap; currency swap; credit default swap; futures market; options market; call options; put ...

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