FOREX DERIVATIVES

A currency forward contract is a binding agreement to buy or sell a specific amount of foreign currency at a predetermined exchange rate on a specified future date. It is used to hedge against adverse exchange rate movements.

To exchange principal and interest in different currencies between two parties.

Currency futures are standardized contracts traded on organized exchanges with daily mark-to-market settlement, whereas forward contracts are customized OTC agreements settled only at maturity. Futures require margin deposits while forwards do not.

A contract to lock in an interest rate for a future period on a notional amount.

A currency option gives the holder the right, but not the obligation, to buy or sell foreign currency at a specified strike price on or before the expiry date. It protects against adverse rate movements while allowing participation in favorable moves.

The difference between the spot rate and the strike price of the option.

A currency swap involves the exchange of principal and interest payments in one currency for equivalent payments in another currency between two parties. Banks use it to obtain cheaper foreign currency funding and to hedge long-term forex exposure.

Sensitivity of option price to changes in domestic interest rates.