There are types of financial instruments that are used in foreign exchange market. Every trader in forex trading should be aware of these types. The financial instruments include spot, forward, future, option and swap.
Spot
A spot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the Spot market. Spot has the largest share by volume in FX transactions among all instruments. There is a two-day period when FOREX transactions have to be settled; this is true for all transactions except Canadian transactions, where settlement period is only one day.
Forward
One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.
Future
A currency future is similar to a forward, with an agreement to do a trade FOREX at an agreed price on a pre-determined date in the future. A futures contract, however, is traded on a regulated exchange, while forwards are transacted in the open market. Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.
Swap
It combines spot trade and forward transactions. A swap involves two parties agreeing to trade FOREX on one date and also to reverse the transaction on a specified date in the future. These are not contracts and are not traded through an exchange.
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Spot
A spot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the Spot market. Spot has the largest share by volume in FX transactions among all instruments. There is a two-day period when FOREX transactions have to be settled; this is true for all transactions except Canadian transactions, where settlement period is only one day.
Forward
One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.
Future
A currency future is similar to a forward, with an agreement to do a trade FOREX at an agreed price on a pre-determined date in the future. A futures contract, however, is traded on a regulated exchange, while forwards are transacted in the open market. Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.
Swap
It combines spot trade and forward transactions. A swap involves two parties agreeing to trade FOREX on one date and also to reverse the transaction on a specified date in the future. These are not contracts and are not traded through an exchange.
CURRENCY TRADING COURSE
CNNMONEY.COM
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THE WALL STREET JOURNAL
Nowhere to Hide for Equities after Jobs Data, Oil, and GM
McCain, Obama deliver Economic-Aid proposals
Job Losses Suggest Economic Weakness to Persist
Federal, Florida Regulators close first priority Bank.
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