Foreign exchange derivatives are a type of financial contract. Foreign exchange derivatives usually refer to foreign exchange trading instruments derived from native assets. Its value depends on one or more underlying assets or indexes. The basic types of contracts include forwards, futures, swaps (swaps) and options. Foreign exchange derivatives also include structured financial instruments with one or more of the characteristics of forwards, futures, swaps (swaps) and options.
Foreign exchange options
Foreign exchange options (foreign exchange options), also known as currency options, refer to the purchase or sale of a certain amount of foreign exchange at the specified exchange rate after the purchaser of the contract pays a certain option fee to the seller. Option of assets. Foreign exchange options are a type of option. Compared with other types of options such as stock options and index options, foreign exchange options are bought and sold in foreign exchange, that is, the option buyer obtains a right after paying the corresponding option premium to the option seller, that is, the option buyer After paying a certain amount of option premiums, the right to purchase and sell the currency agreed by the seller at the agreed exchange rate and amount in advance on the agreed expiry date, and the buyer of the right also has the right not to execute the above-mentioned sales contract.
Futures are the opposite of spot. Futures are the subject matter that is traded now, but will be settled or delivered in the future. The subject matter can be a commodity (such as gold, crude oil, agricultural products), a financial instrument, or a financial indicator. The day for the settlement of futures can be one week later, one month later, three months later, or even one year later. The contract or agreement for buying and selling futures is called a futures contract. The place where futures are bought and sold is called the futures market. Investors can invest or speculate in futures. Inappropriate speculation on futures, such as short selling without stock, can lead to turbulence in the financial market.
Forward is the promise of both parties to the contract to buy or sell a certain amount of the subject matter at a certain price on a certain day in the future (the subject matter can be physical commodities such as soybeans and copper, or financial products such as stock indexes, bond indexes, foreign exchange, etc.).
(1) Forward contract is the earliest financial derivative instrument. The parties to the contract agree to buy or sell an agreed amount of related assets at an agreed price on a certain date in the future.
(2) At present, there are mainly two types of forward contracts: currency forwards and interest rate forwards.
(3) During the validity period of the forward contract, the value of the contract changes with the fluctuation of the relevant asset market price. If the contract is settled in cash when the contract expires, when the market price is higher than the contract’s agreed execution price, the seller will pay the buyer the price difference; on the contrary, the buyer will pay the seller the price difference. The possible gains or losses of both parties are infinite.
Swap Transaction (Swap Transaction) refers to a form of transaction in which both parties agree to exchange certain assets with each other in a certain period in the future. To be more precise, a swap transaction is a transaction in which the parties agree to exchange cash flow (Cash Flow) that they believe to have equivalent economic value within a certain period in the future. The more common ones are currency swap transactions and interest rate swaps. Currency swap transaction. Currency swap transaction refers to the exchange transaction between two currencies. Under normal circumstances, it refers to the principal exchange of two currency funds. Interest rate swap transaction is one of the different types of interest rates of the same currency funds. Inter-exchange transactions are generally not accompanied by the exchange of principal. Swap transactions, like futures and options transactions, are one of the financial derivatives that have developed rapidly in recent years and have become an important tool for international financial institutions to avoid exchange rate and interest rate risks.