Definition: Foreign-currency-linked derivative

Category: External debt - IMF

Derivatives whose value is linked to foreign currency exchange rates. The most common foreign-currency-linked derivatives are: 

• Forward-type foreign exchange rate contracts, under which currencies are sold or purchased for an agreed exchange rate on a specified day; 

• Foreign exchange swaps, whereby there is an initial exchange of foreign currencies and a simultaneous forward purchase/sale of the same currencies; 

• Cross-currency interest rate swaps, whereby— following an initial exchange of a specified amount of foreign currencies—cash flows related to interest and principal payments are exchanged according to a predetermined schedule; and 

• Options that give the purchaser the right but not the obligation to purchase or sell a specified amount of a foreign currency at an agreed contract price on or before a specified date. http://ec.europa.eu/eurostat/ramon/statmanuals/files/external_debt_guide_2003_EN.pdf#page=227