ABSTRACT
This chapter explores financial forward, futures and options contracts. It discusses foreign exchange forward agreements that are offered by large banks to allow their customers to hedge exchange rate risk. It also shows how exchange rates are determined by supply and demand in the foreign exchange market. A foreign exchange futures market trades standardized contracts to buy or sell some amount of foreign exchange on a future date at a determined price. A financial forward contract is an agreement between two parties to buy or sell an agreed-upon amount of a financial asset on a date in the future at a price determined today. Financial forward transactions can be used to hedge the risks associated with price changes of any financial instrument. The chapter finally provides an example of how derivatives brought down an otherwise healthy British investment bank and a wealthy southern California county.
