An agreement to exchange an asset for cash in the future at a predetermined fixed price (Saunders & Cornett, 2011). Unlike options, futures contracts must be satisfied regardless of a future price change (Saunders & Cornett, 2011). Forward contracts are individually negotiated and the terms and conditions of the contract may differ from one contract to another (Saunders & Cornett, 2011). Futures contracts are not traded on exchanges, thus increasing the risk associated with this type of derivatives (Saunders & Cornett, 2011). A global survey conducted by Servaes, Tamayo, and Tufano (2009) suggested that forward contracts are the preferred method used by companies in managing foreign exchange risk. Saunders and Cornett (2011) noted that trading (includes spot market and foreign currency forward market trading) in foreign currency “dominates direct portfolio investment” (p. 430). Today a 6-month forward contract is negotiated between the buyer and the seller for the delivery of a 10-year $85 face value bond for $80. In 6 months, the contract buyer must pay to the seller $80 in exchange for a 10-year bond with a par value of $85. This contract must be honored regardless of whether the cost of a 10-year bond with a par value of $85 increases or decreases in price during the of 6 months. Similar to forward contracts, futures contracts are agreements to exchange an asset for cash at a predetermined date in the future (Saunders & Cornett, 2011). However, unlike forward contracts, the value of the contract at the future date is determined through a daily mark to market (Saunders & Cornett, 2011). Additionally, mark-to-market requires daily cash payments on the contract value (Saunders & Cornett, 2011). Futures contracts are also traded on exchanges......middle of paper......(2011). Managing Financial Institutions: A Risk Management Approach (7th ed.). New York, NY: McGraw-Hill/Irwin.Şontea, O., & Stancu, I. (2011). An optimization of risk management using derivatives. Theoretical and Applied Economics, 18(7), 73-84. Retrieved from http://www.ectap.ro/Servaes, H., Tamayo, A., & Tufano, P. (2009). The theory and practice of corporate risk management. Journal of Applied Corporate Finance, 21(4), 60-78. http://dx.doi.org/10.1111/j.1745-6622.2009.00250.xSudacevschi, M. (2010). Innovations in the financial markets. Using derivatives to hedge banking market risk. Internal Audit and Risk Management, 20(4), 49-60. Retrieved from http://www.univath.ro/Yung-Ming, S., & Moles, P. (2010). What motivates banks to use derivatives: Evidence from Taiwan. Journal of Derivatives, 17(4), 67-78. Retrieved from http://www.euromoneyplc.com/