Abstract
By virtually any measure, the foreign exchange market is enormous. In 2007, the daily turnover in foreign exchange markets averaged $3.2 trillion daily. This figure includes spot transactions in which one currency is exchanged for another for immediate delivery, and the spot exchange market accounts for slightly more than $1 trillion of this total (Bank for International Settlements [BIS], 2007, p. 4). But it also includes activity in foreign exchange (FX) derivatives markets. These derivative markets include forwards, futures, options, swaps, and a variety of other more esoteric instruments. This chapter briefly surveys the pricing principles for foreign exchange contracts and discusses the principal types of foreign exchange derivatives.
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