FX Flashcards
(11 cards)
What is an FX forward contract?
An agreement to buy or sell a currency at a fixed exchange rate on a future date, used to hedge exchange rate risk.
What is the primary purpose of using FX forwards?
To lock in an exchange rate and eliminate uncertainty in future cash flows involving foreign currency.
What is an FX swap?
A simultaneous purchase and sale of identical amounts of one currency for another with two different value dates.
What are FX swaps used for?
To manage short-term liquidity and to hedge currency risk over multiple time periods.
What is a cross-currency swap?
An agreement to exchange principal and interest payments in different currencies, typically over a long term.
What is the benefit of a cross-currency swap?
It allows firms to access funding in one currency while paying interest in another, often at better rates.
What is an FX call option?
A financial contract that gives the buyer the right, but not the obligation, to buy a currency at a set rate before a specified date.
When would a company use an FX call option?
When it expects the foreign currency to appreciate but wants to limit downside risk.
What is the key difference between an FX forward and an FX option?
FX forwards are binding contracts; FX options are not—they provide the right but not the obligation to transact.
What is the risk of using FX forwards?
If the market moves favorably, the company misses out on potential gains due to the locked-in rate.
Why might a firm choose options over forwards?
Options offer flexibility and downside protection while allowing upside participation, though they come with a premium cost.
