ABSTRACT
A derivative is a financial contract which gains or loses values with the movement of the price of a commodity or a financial asset. Commodities and financial futures contracts are examples of derivatives. Derivatives do not involve the direct ownership of an asset or the existence of a liability, and therefore do not typically appear on a balance sheet, but nevertheless do create the opportunity for speculative gains or losses. Many domestic financial derivatives have become quite controversial, due to large losses being suffered on such contracts by hedge funds (Long Term Capital Management), nonfinancial corporations (Procter & Gamble), and even local governments (Orange County, California) in recent years. Our concern, however, is only with international derivatives, such as foreign exchange forwards, futures, and options.
