ABSTRACT
This chapter focuses on foreign exchange (forex) risk; that is, the risk emanating from fluctuations in currencies. Exchange rates may be affected by several economic factors, thereby their analysis and modeling is challenging. Currency futures contracts are traded and cleared on organised and regulated exchanges under standardised contract terms. The existence of a secondary market for these contracts allows open positions to be closed before their maturity date. Companies find that the use of currency derivative contracts for hedging exchange rate risk is more profitable than the use of money market instruments. The currency forward market is the market for the future delivery of a currency, at an exchange rate agreed today. The price of the underlying instrument is the value of this currency, which is determined by the interactions of supply and demand for each of the two currencies. Currency futures, on the other hand, are commitments to buy or sell one currency for another currency in the future.
