Business Question

[violet28]

What's the difference between forwarding exchange contract, swap contract and currency exchange contract?

[Grace0702]

There are three main types of derivatives used by businesses to minimise the risk associated with currency fluctuations. These are:

Forward exchange contract: A contract where two parties agree to exchange one currency for another at an agreed upon exchange rate for a fixed amount of time.

Options contract: A contract that gives the buyer (options holder) the choice (but not obligation) to buy or sell foreign currency at some time in the future at an agreed rate. This way option holders are protected from unfavourable exchange rate fluctuations

Swap contract: An agreement to exchange currency in the spot market with an agreement to reverse the transaction in the future. Used by businesses as they can alter their exposure to exchange fluctuations without discarding original transactions