Foreign exchange (FX) derivatives
Foreign exchange (FX) derivatives

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Foreign exchange (FX) derivatives
  • What is a FX derivative?
  • Common FX derivatives and their uses
  • Documentation of foreign exchange contracts
  • FX transactions in a period of market disruption
  • International Foreign Exchange Master Agreement (IFEMA)
  • International Foreign Exchange and Currency Option (IFXCO) Master Agreement
  • International Currency Options Market (ICOM) Master Agreement
  • Collateral documentation
  • The Cross Product Master Agreement (CPMA)
  • more

BREXIT: The UK is leaving the EU on Exit Day (as defined in the European Union (Withdrawal) Act 2018). This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Key issues for derivatives transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What is a FX derivative?

A foreign exchange (FX) derivative is a type of derivative whose payoff depends on the foreign exchange rates of two or more currencies. The market for foreign exchange is measured in trillions of dollars, and includes a substantial amount of FX derivative contracts. 80% of all FX trades involve the US Dollar, which is considered to be the world's premier reserve currency.

The majority of foreign exchange trades take place in the ‘spot’ market, which is a reference to a buyer or seller of foreign currency trading on the price quoted at the time of the trade. Such trades are usually settled within two business days of execution. Most FX derivatives are short-dated with a maturity date of less than one year, meaning that FX derivatives carry less credit risk than other types of derivative.

In the case of FX derivatives, there are a number of types of transactions which are commonplace, such as forwards, swaps and options.

Derivative contracts can be traded over-the-counter (OTC) or