1. Forward transaction

Time bargain transaction, under which buyer and seller agree on the supply of goods or currencies specified quantity and quality on a specified date in the future. Characteristics:

• Currency Exchange (calculation) will not happen sooner than two working days after the conclusion of the contract;

• The future exchange rate is also fixed at the conclusion of the transaction;

• The period of payment fixed in the contract;

If there is a real possibility of foreign exchange risk in the future, it is covered by a forward transaction.

Bank opens a forward position in the event that the client buys or sells foreign currency at the forward, i.e. foreign currency exchange on the future fix the date, and if the bank is buying or selling foreign currency at the striker for profit. Here, however, there is the risk of price changes, which may lead to losses of the bank.

2. SWAP

      Swap transaction is the exchange of one currency for another at a certain period of time. It’s a combination of cash transactions - SPOT and forward. Both transactions are to the same time with the same partner.

       SWAP is used as a means to eliminate the risk of interest rates, as well as a means to eliminate the risk of currency fluctuations.

3. Options

    Option - an agreement between a buyer and a seller that gives the buyer the right - but not the obligation - to buy the currency from the option seller or sell it.

      An option is an option for full coverage of foreign exchange risks. It can be used as an insurance policy, using the unfavorable exchange rate movements. Compared with the forward, option gives the best protection against the possible risks, because the option buyer reserves the right to choose the exercise or non-exercise of the transaction.

4. Futures

      Futures contracts are special markets and, unlike a forward contract, futures contract does not provide for the purchase sale of real currency. Futures positions eliminated by counter contracts. The risk in futures minimized due to the possibility to cover the obligation under the first futures contract through the counter reverse transaction.

      The essence of the main methods of spot and term insurance is to ensure to implement foreign exchange transactions before the rate change will adversely or compensate for losses from such a change in head due to the parallel currency transactions, the rate of which varies in the opposite direction.

Финансовые рынки и финансово-кредитные институты для бакалавров и магистров ... Белоглазова Г Н - Google Книги

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1.3 Risk management

1.3.1 The history of the theory of risk management

• In 1738 the Swiss mathematician Daniel Bernoulli supplemented probability theory by usefulness or attractiveness of an outcome of events. Bernoulli's idea was that, in the decision-making people pay more attention to the size of the effects of different outcomes than their probability.

• At the end of XIX century English explorer F. Galton suggested considering regression or a return to the mean value of the universal statistical laws. The essence of the regression interpreted them as a return to normal phenomena over time. Subsequently, it was shown that the rule regression is valid in a variety of situations, ranging from gambling and calculating the probability of accidents, and ending forecasting business cycle fluctuations.

• In 1952, the University of Chicago graduate student Harry Markowitz in his article "The diversification of investments» («Portfolio Selection») mathematically based strategy of diversification of the investment portfolio, in particular, he demonstrated how via careful allocation of investments to minimize the deviation from the expected rate of return.

• In 1960 - James Tobin and Bill Sharpe developed CAPM (Capital Asset Pricing Model - CAPM). In 1972, based on the Chicago Commodity Exchange was created Foreign Exchange Market, which specialized in transactions with foreign exchange futures and options on futures on major currencies

• In 1990, Mr. Markowitz was awarded the Nobel Prize for developing the theory and practice stock assets portfolio optimization.

• The formation of risk management as an exact science accounts for 1973. This year was marked by two important events: the abolition of Bretton Woods system of fixed exchange rates, and the publication of the famous Black and Scholes option pricing formula. The transition to free-floating exchange rates in most developed countries was a powerful stimulus to quantify and manage foreign exchange risk, and the approach of Black and Scholes model was adopted as a theoretical framework for the assessment and management of all types of market risks. ru.wikipedia.org/wiki/Риск-менеджмент