Chapter 7: Derivatives and Derivative Markets
Forward and Future contracts in Foreign Exchange
- Forward Transactions – traders agree today to a forward contract to exchange currencies or
bank deposits at a specific future date at an exchange rate known as the forward rate.
1. Forward Contract - private agreements among traders to exchange any amount of currency
on any future date.
2. Future Contract – traded on exchanges such as CBOT and price changes continually as
contracts are bought and sold on the exchange
- Option – a type of derivative contract in which the buyer has the right to buy or sell the
underlying asset at a set price during a set period of time
- Option Premium – the price of an option
- Strike Price or Exercise Price – the price at which the buyer of an option has the right to
buy or sell the underlying asset
- Put Option – a type of derivative contract that gives the buyer the right to sell the underlying
asset at a set price during a set period of time
• American Options – an