Currency Derivatives for Amazon

Currency Derivatives
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Currency Derivatives
Currency derivatives are contracts that are used to buy and sell currencies at a future date, deriving their value from their underlying currency (Madura, 2021). They are traded in the regulated market and the underlying is the exchange rate of currencies of the two countries (Gope & Mitra, 2018). They are often used as a risk management tool because they protect traders from future price volatility. The various types of currency derivatives include currency futures contracts, currency forward contracts, and currency options contracts.
Definitions
Currency Future Contracts: In this type of contract, there is a pre-specified date and amount of currencies that will be exchanged at a specified date in the future (Wang, 2020). These terms remain the same between the parties regardless of the currency’s price at the time of contract expiry in the market. The pre-specified price is the exchange rate and as such, futures contracts are sold in a foreign exchange market (Madura, 2021).
Currency Forward Contracts: In this type of contract, the parties agree on the specific currencies to be exchanged in the future, with a specified date and price (Madura, 2021). It occurs in the over-the-counter (OTC) market.
Currency Options Contracts: In this type of contract, the parties are allowed to trade in currency at a pre-specified time and price in the future, but are not obligated to trade at the time of the contract's expiration (Gope & Mitra, 2018). There are two types of options namely call and put options. A call option gives the owner the right, but not the obligation, to buy the currency at a pre-specified p...