Updated May 2026: I’ve refreshed this FX derivatives guide with newer BIS and Bank of England turnover data, clearer distinctions between forwards, NDFs, FX swaps and currency swaps, and more practical examples of how businesses, funds and traders use these products.
Introduction
FX derivatives are financial instruments whose value is derived from currency exchange rates. That is the key idea. The contract is not the currency pair itself. It is a deal whose price, payout or value depends on what happens to an exchange rate.
A simple example is a business that knows it must pay a supplier in euros in three months’ time. If the business reports in dollars, it may not want to gamble on where EUR/USD will be by then. An FX forward lets it agree an exchange rate today for that future payment. That is a derivative being used for hedging rather than speculation.
The same broad market also serves very different users. An import-export business may want to lock in a rate. A company buying an overseas asset may need to manage currency exposure. A bank may use FX swaps to manage short-term currency funding. A hedge fund may use forwards, options or swaps to express a view on whether a currency peg can hold. A retail trader may use CFDs or futures to speculate on a currency move.
Spot FX is the starting point. That is the market price for exchanging one currency for another now. FX derivatives take that currency exposure and turn it into a contract for a future date, a conditional right, a leveraged trade, a funding arrangement, or a hedge against an unwanted move.
From simple forward contracts to options, futures, CFDs, FX swaps and currency swaps, the product set can look confusing at first. This guide starts with the basic examples and then works up to the more detailed distinctions, including where each product trades, who tends to use it, and what risks matter.
Different Types of FX Derivatives
There are several types of instruments built around currency exchange rates. They differ in where they trade, how flexible they are, whether the currency is physically delivered, and whether the product is mainly used for hedging, funding or speculation.
The main types covered below are forwards, non-deliverable forwards, futures, options, CFDs, FX swaps, currency swaps and swaptions.
Forward Contracts
A Forward Contract is a private agreement between two parties to buy or sell a particular currency at a predetermined price, at a specific future date. It is custom-made to the parties’ requirements, which means contract sizes and settlement dates are flexible. They are not traded on regulated exchanges and so you have counterparty risk, meaning if the other side refuses to honour the contract or goes bust in the meantime that problem is on you and your lawyers. These deals may or may not involve brokers and financial institutions who may add some protection to the deal and are considered to be traded OTC (over the counter) i.e. not on a regulated exchange.
Use Cases: Forward contracts are popular with businesses dealing in foreign trade. They allow the business to lock in an exchange rate for a specific invoice, acquisition payment, loan repayment, dividend, or other future cash flow.
A normal forward is easiest to understand when the currency can be delivered without much difficulty. NDFs exist for situations where that delivery part is the problem.
Non-Deliverable Forwards (NDFs)
A non-deliverable forward is a forward-style FX contract used when the currency exposure needs hedging, but full delivery of that currency is awkward, restricted, or not practical.
A simple forward normally ends with the two sides exchanging the agreed amounts of currency. An NDF does not. Instead, the two sides agree a future exchange rate and, on the settlement date, compare that agreed rate with a published market reference rate. The side that is out of the money pays the difference to the other side, usually in a major settlement currency such as U.S. dollars.
For example, a company may have exposure to the Indian rupee but not want to physically receive or deliver rupees offshore. It agrees an NDF rate with a bank. At settlement, the agreed rate is compared with the published reference rate for the rupee. If the rupee has moved against the company’s exposure, the NDF payment helps offset that loss. If the move goes the other way, the company pays the bank.
The important difference from a normal forward is that only the net gain or loss is paid. The full currency amount is not exchanged through the NDF.
NDFs are common in emerging-market currencies where normal delivery can be difficult because of capital controls, convertibility rules, settlement restrictions, or local market practice.
Use cases: NDFs are used by companies, banks and funds that want to hedge or take exposure to a currency without physically exchanging the full amount at maturity.
Futures Contracts
FX Futures Contracts, like Forward Contracts, involve an agreement to buy or sell a currency at a predetermined price on a specific future date. However, unlike Forward Contracts, Futures are standardized and traded on regulated exchanges such as the Chicago Mercantile Exchange (CME). Clearing through an exchange clearinghouse greatly reduces bilateral counterparty risk, because the clearinghouse stands between buyer and seller.
Use Cases: Futures are commonly used for both hedging and speculation. They allow traders to bet on the direction of currency movement and hedge against potential losses. Futures contracts by their very nature are highly leveraged instruments.
Options Contracts
FX Options Contracts provide the right, but not the obligation, to buy (call option) or sell (put option) a specific amount of a currency at a set price, at any time before the contract expires. They can be OTC (customised) or exchange traded (standardised) with the same implications of counterparty risk mentioned above. They can be written on spot FX or on currency futures. Options on futures are sometimes referred to as “futops” in trader shorthand. Large options exchanges include the CBOE (Chicago Board Options Exchange) and ISE (International Securities Exchange).
Use Cases: Options are versatile and can be used for hedging, speculation, or generating income. They provide traders with a chance to profit from market fluctuations without the obligation of fulfilling the contract.
Contract for Differences (CFDs)
FX CFDs are a type of derivative where the parties agree to exchange the difference in value of a currency pair between the time the contract is opened and when it is closed. They are traded OTC but often have generalised specifications when it comes to online regulated providers. Protections for customers have been increasing recently for retail speculators trading CFDs. Large, mostly retail focussed CFD providers are firms like IG and CMC Markets.
Use Cases: CFDs are a popular choice for short-term traders and speculators as they allow for high leverage and the ability to profit from both rising and falling markets they also offer much smaller trade sizes than traditional futures contracts. Although futures exchanges are speeding into micro and nano sized offerings to fight for this share of retail speculators with small accounts.
Swap Contracts
A swap is a financial derivative that allows two parties to exchange financial instruments, such as interest payments, currencies, or commodities. Unlike futures, swaps are mostly traded OTC without a clearinghouse involved (although some jurisdictions now require mandatory clearing for certain swaps post-financial crisis).
Without the standardized exchange specifications imposed on futures, swaps can be fully customized to the client’s requirements, are subject to custom credit agreements, and thus don’t require upfront margin, reducing immediate cash flow burdens. Additionally, swaps allow for managing basis risk, such as differences between regional oil prices (e.g., Far East vs. Mediterranean oil), which futures may not address as effectively.
The intent of a swap is usually to hedge some form of risk or to gain access to a type of asset or interest rate that might not be otherwise available to one of the parties.
- FX Swaps: An FX swap is essentially a combination of a spot transaction and a forward transaction. An FX Swap is a two-legged financial transaction. In the first leg, the trader buys (or sells) a certain amount of a currency against another at the agreed spot price. In the second leg, which is agreed upon at the outset, the trader reverses the trade, selling (or buying) the same amount of currency back at a future date and at a price agreed upon in the contract (the forward price). The main purpose of FX Swaps is to hedge against FX exposure or adjust the maturity of an existing forward FX position.
- Currency Swaps: A Currency Swap is a more complex type of swap transaction. It involves the simultaneous exchange of one currency for another, and the agreement to reverse the exchange at a later date (which could be many years into the future). However, in addition to the principal amounts, Currency Swaps also involve exchanging interest payments over the life of the agreement. These interest payments are based on the principal amounts and the stipulated interest rates. Currency Swaps are typically used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing directly in a foreign market or as a method of hedging long-term FX exposure.
- Interest Rate Swaps: This is another common type of swap for comparison. In an interest rate swap, two parties exchange interest payments, typically one with a fixed rate and one with a floating rate (a vanilla swap). The party paying the fixed rate will pay a set rate of interest on a nominal principal amount, while the party paying the floating rate will pay an interest rate that varies with a reference interest rate (such as SOFR) on the same nominal principal amount. The actual principal does not change hands. Only the interest payments are swapped. This type of swap is often used by companies to manage interest rate risk. So, the difference between fixed and floating in this context is that the fixed rate is set at the beginning of the contract and doesn’t change, while the floating rate can vary over the life of the contract, usually pegged to a reference rate.
Use Cases: Swaps are typically used by financial institutions and corporations to fund foreign currency investments, and manage risks associated with fluctuations in exchange and interest rates.
Swaptions
A swaption, specifically, is an option on a swap. It gives the holder the right, but not the obligation, to enter into a swap at a future date. Like swaps, swaptions are typically traded OTC.
Use Cases: Swaptions are typically used by corporations and investors for hedging purposes, to protect against large swings in exchange rates, or to take advantage of expected movements in currency rates.
| FX derivative | Typical venue | Delivery / settlement | Common users | Main use | Main risk |
|---|---|---|---|---|---|
| Forward | OTC | Usually physical delivery of both currencies | Corporates, banks, funds | Custom hedge for a known future cash flow | Counterparty risk |
| NDF | OTC | Cash-settled difference, usually in USD | Banks, funds, Emerging-market corporates | Hedge or trade currencies where delivery is difficult | Reference-rate and counterparty risk |
| Futures | Exchange | Standardised exchange contract | Futures traders, hedgers, funds | Hedge or speculate with clearinghouse protection | Leverage, margin calls and contract expiry |
| Options | OTC or exchange | Right, not obligation, to exchange or cash-settle | Corporates, banks, funds, traders | Hedge downside while keeping upside open | Premium cost, complexity and volatility risk |
| CFDs | OTC | Cash difference only; no currency delivery | Retail and short-term traders | Leveraged speculation on currency moves | Provider risk, leverage and financing costs |
| FX swap | OTC | Two FX legs, usually near/far dates | Banks, corporates, funds | Funding, rolling hedges, liquidity management | Rollover, funding and counterparty risk |
| Currency swap | OTC | Principal plus interest exchanges over longer term | Corporates, banks, issuers | Long-term funding and FX/interest-rate management | Credit, rate and currency risk |
| Swaption | OTC | Option to enter a swap | Corporates, banks, institutions | Optional future swap exposure | Premium cost, complexity and model risk |
Understanding the FX Derivatives Market
The FX market is the largest financial market in the world. BIS data showed average daily OTC FX turnover reaching about $9.6 trillion in April 2025, up from $7.5 trillion in April 2022. Spot, outright forwards and options grew strongly, while FX swaps remained the largest instrument category even though their share of total turnover fell from 2022 levels.
London remains one of the key centres of global FX trading. The Bank of England’s April 2025 survey showed UK spot FX turnover rising to $1,293 billion per day, FX swaps at $1,563 billion per day, and FX options at $350 billion per day. In the October 2025 survey, FX swaps rose further to $1,840 billion while spot turnover fell to $1,059 billion.
Those numbers are pertinent because the products in this guide are not niche instruments. FX forwards, swaps, options and related contracts sit at the centre of how global trade, cross-border funding, investment hedging and currency speculation are managed.
Market Structure
The FX derivatives market is split between OTC trading and exchange-traded products, but the OTC side is the heart of the market.
OTC means over the counter. The trade is agreed directly between two parties, often a bank and a client, rather than on a regulated exchange. Forwards, NDFs, FX swaps, currency swaps and many options are commonly traded this way. The advantage is flexibility. The contract can be shaped around the size, date, currency pair and business need. The downside is counterparty risk and less standardisation.
Within the OTC market, people often talk about the interbank or wholesale market and the client or retail market.
The interbank market is where large banks, dealers and major liquidity providers trade with each other. This is the institutional layer of FX. It is where a lot of pricing, hedging, liquidity management and risk transfer happens between professional counterparties.
The client market is where banks, brokers and platforms deal with corporates, asset managers, hedge funds, smaller financial firms and retail traders. A company hedging an overseas invoice, a fund hedging a foreign portfolio, or a retail trader using a CFD platform is not usually trading directly in the same way as a major bank in the wholesale market. They are typically dealing through an intermediary.
The price, spread, credit terms, margin treatment and protections can be very different depending on where you sit in the market. A large corporate negotiating an FX forward with a bank is not in the same position as a retail trader clicking buy or sell on a leveraged FX CFD.
One modern change worth noting is the rise of non-bank electronic market makers.
Historically, most people thought of wholesale FX as a bank-dominated market. The largest banks still matter, but electronic trading opened the door for specialist market-making firms that use technology, data and pricing models rather than a traditional bank balance sheet and branch network.
XTX Markets is one of the best-known examples. Founded by Alex Gerko in 2015, it made a striking entrance into Euromoney’s 2016 FX rankings, placing ninth overall with a 3.87% market share in its first year of eligibility. By 2018 it had climbed to third overall with a 7.36% share. In 2019, Euromoney still ranked XTX fourth overall in global FX market share, but second in spot/forward with a 9.92% share. XTX later described itself as the largest global spot FX liquidity provider.
| Year | Public marker | What it showed |
|---|---|---|
| 2016 | 9th overall in Euromoney FX rankings, 3.87% share | First non-bank top-ten shock |
| 2018 | 3rd overall, 7.36% share | XTX had become a top-tier FX liquidity provider |
| 2019 | 4th overall, 7.22%; 2nd in spot/forward, 9.92% | Non-bank liquidity was no longer marginal |
| Current | Around $250bn daily traded volume across global markets | XTX had become a major cross-asset electronic market maker |
For a client, the quote on screen may still come through a bank, broker, platform or liquidity aggregator. Behind that quote, however, the liquidity may be coming from a bank, a non-bank market maker, or several sources competing electronically. That is a very different market from the old image of dealers shouting prices down a phone.
Exchange-traded products sit alongside the OTC market. Currency futures and some FX options are standardised and traded through regulated exchanges. The contract terms are fixed by the exchange and clearing is handled through a clearinghouse. That reduces bilateral counterparty risk, but it also means the contract may not match a company’s exact exposure as neatly as a custom OTC forward or swap.
A business hedging a specific euro invoice in three months may prefer a forward. A futures trader speculating on the euro or yen may prefer exchange-traded contracts. A bank managing short-term dollar funding may use FX swaps. The product choice depends on the problem the user is trying to solve.
Key Market Participants
The FX derivatives market is used by very different groups, and they are not all trying to do the same thing.
Banks and dealers sit near the centre of the market. They quote prices, provide liquidity, structure trades for clients, hedge their own books, and use FX swaps to manage short-term currency funding. A bank may be helping a corporate hedge a future euro payment on one desk while using the interbank market to manage the risk created by that client trade.
Non-bank market makers are now part of that liquidity picture too. Firms such as XTX, Jane Street, Citadel Securities, Jump, Virtu and others use automated pricing and trading systems to quote across large numbers of instruments. They do not look like traditional banks, but in electronic FX they can still be important sources of liquidity.
Corporates use FX derivatives for practical business reasons. An importer may want to lock in the exchange rate for a future supplier payment. An exporter may want to protect the value of foreign-currency revenues. A company buying an overseas business may need to manage exchange-rate risk between signing and completion. For these users, the derivative is usually a hedge against a business exposure rather than a standalone trading idea.
Asset managers, pension funds and insurers often use FX forwards and swaps to hedge foreign investments. For example, a UK fund holding U.S. shares has exposure to both the share price and GBP/USD. The fund may want the U.S. equity exposure but not the full currency exposure.
Hedge funds and macro traders may use forwards, futures, options, swaps or NDFs to express a market view. That could be a view on interest-rate differentials, central-bank policy, a currency peg, political stress, commodity-linked currencies or relative value between markets.
Retail traders usually meet FX derivatives through CFDs, rolling spot FX, futures or options. The platform may make the trade look simple, but the underlying issues are still serious: leverage, financing, spreads, margin calls, provider risk and regulation.
| Participant | Common FX derivative use |
|---|---|
| Importer / exporter | Lock in future exchange rates for invoices and cash flows |
| Corporate treasury | Hedge foreign revenues, debt, dividends, acquisitions or subsidiaries |
| Bank / dealer | Market-making, liquidity, funding and client hedging |
| Asset manager / pension fund | Hedge overseas assets back to base currency |
| Hedge fund / macro trader | Trade currency views, pegs, rates, volatility or stress events |
| Retail trader | Trade CFDs, rolling FX, futures or options with leverage |
| Non-bank market maker | Provides electronic liquidity and pricing, often competing with banks in spot FX and related markets |
Regulatory Environment
FX derivatives regulation depends on the product, the trading venue, the counterparty and the jurisdiction. Spot FX, futures, options, CFDs, forwards and swaps are not all supervised in exactly the same way.
In the United States, banking regulators are important when the activity sits inside a bank. The Office of the Comptroller of the Currency (OCC) supervises national banks and federal savings associations. The Federal Reserve supervises bank holding companies and parts of the banking system. The Federal Deposit Insurance Corporation (FDIC) supervises insured banks and protects covered deposits. For banks active in FX and derivatives, these regulators care about risk management, capital, controls, counterparty exposure and operational processes.
Currency futures and options on futures sit more squarely in the futures-regulation world. The Commodity Futures Trading Commission (CFTC) regulates U.S. derivatives markets, including futures and options on futures. The National Futures Association (NFA) is the industry self-regulatory organisation for U.S. futures, forex and derivatives firms. Retail off-exchange forex activity also has specific CFTC and NFA rules, which is why U.S. retail FX can look different from the offshore retail platforms some traders see advertised online.
In Europe, the European Securities and Markets Authority (ESMA) plays an important role in financial-market regulation across the EU. ESMA has been especially visible in retail CFD rules, including leverage limits and investor-protection measures. In the United Kingdom, the Financial Conduct Authority (FCA) regulates financial services firms and market conduct, while the Prudential Regulation Authority (PRA), part of the Bank of England, supervises the safety and soundness of banks, insurers and major investment firms.
For institutional users, regulation affects reporting, collateral, margin, clearing, capital treatment, documentation and who can trade which product with whom. A bank trading an FX swap with another bank is not in the same regulatory position as a retail customer trading a leveraged CFD through an online platform.
For a retail trader, the practical questions are simpler but no less important. Who is the provider? Where is it regulated? Is it a bank, broker, futures commission merchant, CFD provider or offshore platform? What client protections apply? What leverage is allowed? How is client money treated? What happens if the provider fails?
Regulatory jurisdiction is part of the risk. A firm regulated in a major jurisdiction such as the UK, EU, U.S., Singapore or Australia is not the same proposition as an offshore provider operating under a lighter regime. Some traders deliberately choose offshore leverage, but they should understand what protections they may be giving up.
Prediction markets and FX event contracts
A newer related category is prediction-market FX contracts. Platforms such as Kalshi and Polymarket may offer markets linked to exchange rates, but these are not the same as a traditional FX forward, option, CFD, future or swap.
Instead of exchanging currencies or entering a normal FX derivative, the user trades an event contract. For example, the market might ask whether EUR/USD will be above a certain level at a specified time, or whether USD/JPY will finish inside a certain range on a certain date. The payoff depends on the event outcome, not on physically exchanging the currencies.
This can look familiar to anyone who remembers “binary options”. The payoff is often yes-or-no: if the exchange-rate event happens, the contract pays out; if it does not, it loses. Economically, that is close to a binary-style payoff.
The regulatory wrapper is different. Retail binary options were largely banned in Europe and the UK after regulators judged them too risky for ordinary investors. ESMA prohibited the marketing, distribution or sale of binary options to retail investors in the EU, and the FCA made its UK ban permanent from April 2019.
Kalshi is a CFTC-regulated Designated Contract Market in the U.S. and has listed FX-style event contracts. Polymarket is more complicated because there is a global crypto-native platform and a U.S. regulated entity. Polymarket US is operated through QCX LLC as a CFTC-regulated Designated Contract Market, while the international Polymarket platform is separate.
For a reader, the practical point is this: these products may reference exchange rates, but they are not the same thing as a forward, future, option, CFD, FX swap or currency swap. They are event contracts linked to a currency outcome.
Key Considerations when Trading FX Derivatives
FX derivatives can be useful, but they are not harmless. The same products used to reduce currency risk can also create large losses if the exposure, leverage or contract terms are misunderstood.
The main risks are market volatility, leverage, counterparty risk, contract mechanics and regulatory jurisdiction.
Market Volatility
Currencies move on interest rates, central-bank policy, inflation data, political risk, trade flows, commodity prices, risk appetite and surprise headlines. A derivative can protect against those moves, but it can also magnify their impact if the position is leveraged or badly sized.
Volatility also affects pricing. FX options, for example, become more expensive when implied volatility rises. Forwards and swaps are affected by interest-rate differentials and funding conditions. The contract may look like a simple exchange-rate trade, but the pricing can reflect more than spot direction.
Leverage
Many FX derivatives use leverage. Futures, CFDs, options and some OTC trades can give exposure far larger than the cash posted up front.
That is attractive because it makes capital go further. It is dangerous because losses can also scale quickly. A small move in the currency pair can become a large percentage move in the account.
Leverage is not automatically bad. It just needs sizing, margin awareness and a plan for what happens when the trade moves against you.
Counterparty Risk
Counterparty risk is the risk that the other side of the trade does not meet its obligations.
In exchange-traded futures, a clearinghouse stands between buyer and seller, which greatly reduces bilateral counterparty risk. In OTC products such as forwards, swaps, NDFs and CFDs, the credit quality of the counterparty matters more directly.
For institutions, that can mean collateral agreements, credit support documents, margining and counterparty limits. For retail traders, it means checking the provider, regulator, client-money protections, financial strength and track record.
Understanding the Contract
Do not trade or hedge with an FX derivative unless you understand what happens at expiry or maturity.
Is the contract physically delivered or cash settled? Are you charged daily to keep the position? Is it exchange traded or OTC? Is there margin? Can margin calls increase? What is the settlement currency? What happens if the contract expires while you still hold it? Are there financing charges, roll costs or option premiums?
That sounds basic, but it is where many mistakes begin. You do not want to discover the delivery mechanics of a futures contract, forward or option only after the position has already gone wrong.
Case Studies
FX derivatives can sound abstract until you see how they have been used in real markets. Two examples show both sides of the market: a famous macro trade that worked, and a control failure that became a major loss.
George Soros and the Bank of England
The 1992 sterling trade is one of the best-known examples of a successful currency bet. George Soros and his fund believed the pound was being held at an unsustainable level inside the European Exchange Rate Mechanism.
The basic trade was to short sterling which meant borrowing pounds, selling those pounds for stronger currencies such as Deutsche marks or dollars, and then hoping to buy the pounds back later at a lower price. If sterling fell, the fund could buy back the pounds more cheaply, repay what it had borrowed, and keep the difference as profit.
The trade was not limited to one neat retail-style order ticket. At the size Soros was operating, the position could involve borrowed sterling, spot FX sales, forwards, futures and options. The point was the same across the instruments: profit if sterling broke lower.
When the UK left the ERM and sterling fell, the trade reportedly made Soros’ fund around $1 billion. The case is useful here because it shows how FX derivatives and related FX positions can be used to express a very specific view: that a currency peg or managed exchange-rate level cannot hold.
It also shows the other side of leverage. Soros was right and the trade became famous. If the Bank of England had successfully defended sterling for longer, a large short position could have become extremely expensive to carry.
Allied Irish Banks, Allfirst and John Rusnak
The John Rusnak case is the ugly side of FX derivatives: not a clever macro trade, but a failure of controls.
Rusnak was a foreign-exchange trader at Allfirst, a U.S. subsidiary of Allied Irish Banks. Over several years, he built up losses in FX trading and hid them from the bank. To cover the damage, he created false records, including fictitious options trades, so that the systems appeared to show hedges or offsetting positions that did not really exist.
The bank thought the trading book was protected or less risky than it actually was. The fake options made the losses look smaller or delayed their discovery. By the time the fraud was uncovered in 2002, AIB said the losses were more than $690 million.
For a professional trading desk, the lesson is boring but vital: independent price checks, real confirmations, risk limits, segregation between front office and back office, and managers who understand the products.
For a retail reader, the smaller version of the same lesson still applies. Know what product you are trading, who the provider is, how it is priced, how it settles, how much leverage is involved, and what can go wrong before the trade is opened.
Final Thoughts on FX Derivatives
FX derivatives are powerful because they let users reshape currency exposure. A company can lock in a future exchange rate. A fund can hedge overseas assets. A bank can manage currency funding. A trader can speculate on a currency move.
That flexibility is also why the products need care. A forward, an NDF, an option, a CFD, an FX swap and a currency swap may all be linked to exchange rates, but they do not behave the same way.
The practical question is what problem you are solving. Are you hedging a known cash flow? Managing funding? Protecting against a worst-case move? Taking a leveraged view? Trying to keep upside open?
Once you know that, the product choice becomes easier. Until you know that, the derivative is probably choosing you rather than the other way round.
FAQs
Q: What is an FX derivative?
An FX derivative is a financial contract whose value is derived from an underlying currency exchange rate. Common examples include forwards, NDFs, futures, options, CFDs, FX swaps, currency swaps and swaptions.
Q: Why do companies use FX derivatives?
Companies use FX derivatives to manage currency risk. For example, an importer may use a forward to lock in the exchange rate for a future supplier payment.
Q: What is the difference between a forward and a future?
A forward is usually a custom OTC contract agreed between two parties. A future is a standardised contract traded on an exchange and cleared through a clearinghouse.
Q: What is an NDF?
An NDF is a non-deliverable forward. It is used when the currency exposure needs hedging, but physical delivery of the currency is difficult, restricted or impractical. Only the net gain or loss is settled.
Q: What is the difference between an FX swap and a currency swap?
An FX swap usually combines two FX legs, such as spot and forward, and is often used for short-term funding or rolling exposure. A currency swap is usually longer term and can involve exchanges of principal and interest payments.
Q: Are FX derivatives risky?
Yes. FX derivatives can involve leverage, counterparty risk, margin calls, settlement risk, volatility risk and contract-complexity risk. They can reduce one risk while creating another.
Q: Can retail traders use FX derivatives?
Yes, but usually through products such as CFDs, rolling FX, futures or options. Retail traders should pay close attention to leverage, regulation, costs, provider risk and whether the product is suitable for them.
Q: Are prediction-market FX contracts the same as normal FX derivatives?
No. Prediction-market contracts may reference exchange rates, but they are event contracts linked to a currency outcome. They are not the same thing as a forward, future, option, CFD, FX swap or currency swap.
