A credit default swap (CDS) is a financial derivative that allows an investor to swap or offset their credit risk with that of another investor. The buyer of a CDS makes periodic payments to the seller and, in return, receives a payoff if the underlying financial instrument defaults.
Currency futures are contracts in the futures markets for delivery in a major currency such as U.S. dollars, Euros, or Japanese yen. Corporations that sell products globally can hedge against adverse exchange rate movements using these futures.
Currency risk, also known as exchange-rate risk or foreign exchange risk, arises from the fluctuation in the exchange rate between two currencies, impacting the value of investments or transactions made in foreign currencies.
A financial instrument that derives its value from the performance of an underlying asset, commodity, currency, economic variable, or financial instrument. Derivatives can be used for hedging, speculation, or arbitrage purposes.
Forward dealing involves transactions in commodities, securities, currencies, freight, etc., for future delivery at a price agreed upon at the time the contract is made. This type of trading enables dealers and manufacturers to hedge future requirements.
A forward-exchange market is a segment of the foreign-exchange market where currencies are traded for delivery at a specific date in the future. This market is used to hedge against the risk of currency fluctuations.
A futures contract is a standardized legal agreement to buy or sell a particular commodity, currency, or financial instrument at a predetermined price at a specified time in the future. Unlike options, futures contracts entail a mandatory obligation to execute the transaction.
A futures market is a financial exchange where futures contracts, which are agreements to buy or sell specific commodities or financial instruments at a predetermined future date and price, are traded.
A futures option is a derivatives contract that grants the holder the right, but not the obligation, to buy or sell a futures contract at a predetermined price before the option expires.
A futures transaction refers to the buying and selling of futures contracts on commodities or financial instruments, which obligate the buyer to purchase or the seller to sell an asset at a predetermined future date and price.
An action taken to reduce or eliminate the risk involved in having an open position in a financial, commodity, or currency market.
An Interest Rate Swap (IRS) is a contractual agreement between two counterparties to exchange periodic payments based on a notional principal amount, typically involving the exchange of a fixed-rate payment stream for a floating-rate payment stream.
Legging-In refers to entering into a hedging contract after becoming the debtor or creditor under a debt instrument. Any gain or loss from legging-in is deferred until the qualifying debt instrument matures or is disposed of in the future.
Legging-out refers to the process of disposing of one or more unmatured elements of a qualified hedging transaction. Any gain or loss from legging-out is deferred until the qualifying debt instrument matures or is disposed of in the future.
Market risk is the potential financial loss arising from fluctuations in market prices. This can include risks from buying in a falling market or selling in a rising market. Hedging with futures contracts or options can mitigate, but not eliminate, these risks.
A naked position, also known as an uncovered or open position, refers to the practice of entering into a derivatives contract—such as options or futures—without holding the underlying asset involved in the contract.
In various contexts such as accounting, banking, printing, and securities, the term 'offset' refers to actions or functions intended to counterbalance or neutralize other actions or amounts. It is used differently across diverse fields, reflecting its versatile nature.
A trading position where a trader holds commodities, securities, or currencies that are bought but unsold or unhedged, exposing them to market fluctuations until the position is closed or hedged.
An option is a financial instrument that gives the holder the right, but not the obligation, to buy or sell an asset at a predetermined price before or at the expiration date.
An optionee is an individual or entity that receives or purchases an option, which grants them the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified time period.
Risk management is a process that aims to help organizations understand, evaluate, and take action on all their risks to maximize their value. This can include taking out insurance or hedging through derivatives.
In financial trading, a square position refers to an open position that has been covered or hedged, neutralizing the trader’s exposure and risk associated with price movements.
Stock index futures are financial derivatives that blend traditional commodity futures trading characteristics with those of securities trading. They utilize composite stock indexes to enable investors to speculate on general market performance or to hedge long or short positions.
A stock option is a financial instrument that gives the holder the right to buy or sell a company's stock at a predetermined price within a specified timeframe. It can be used both as an investment tool and as an employee incentive.
Transaction exposure refers to the risk that a firm's exposure to exchange-rate fluctuations will impact the value of anticipated cash flows from a transaction when the contractual obligation is settled.
