An Overview of Foreign Exchange Derivatives
In international finance, derivative instruments imply contracts based on which you can purchase or sell currency at a future date. The three major types of foreign exchange (FX) derivatives: forward contracts, futures contracts, and options. They have important differences, which changes their attractiveness to a specific FX market participant.
FX derivatives are contracts to buy or sell foreign currencies at a future date. The table summarizes the relevant characteristics of three types of FX derivatives: forward contracts, futures contracts, and options. Because the types of FX derivatives closely correspond to the identity of the FX market participant, the table is based on the derivative type-market participant relationship.
|Forward Contracts||Future Contracts||Options|
|Standardized regarding the amount of currency||No||Yes||Yes|
|Obligation to engage in the transaction on the specified day||Yes||Yes||No, but premium must be paid|
|Traded||No||CME Group GLOBEX
|Useful for MNCs||Yes||Yes||Yes|
|Useful for speculators||No||Yes||Yes|
CME Group: the leading derivative exchange formed by the (2007) merger of the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOT); GLOBEX: an international, automated trading platform for futures and options at CME; ISE: International Security Exchange, a subsidiary of EUREX, a European derivative exchange; OTC: over-the-counter.