Foreign Exchange
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What is a derivative? What is a hedge? What is a forward exchange contract? How might each of these financial instruments be used in foreign exchange?
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Solution Summary
Foreign exchange is examined. Derivatives, hedge, and forward exchange contracts are defined. How each are used as an instrument by use in foreign exchange is determined.
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A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). A call option, for example, is a financial derivative, in which the buyer of the call can buy a fixed number of shares of a company at any time before expiration for a predetermined price, and the seller of that call is obligated to sell the shares when the buyer of that contract wants.
A hedge is a position established in one market in an attempt to offset exposure to price fluctuations in some opposite position in another market with the ...
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