
The FX market is the trading of currencies. But do you know how many alternatives you have at your disposal should you be tempted to try it out?
Short answer: quite a few. In this second part of our series
on financial instruments, we will talk about Forex Exchange Instruments and
their 5 primary types: spot, options, forward, swap, and futures.
Foreign Exchange Spot (FX Spot)
The FX spot transactions involve a settlement between two
counterparts and are pretty easy to understand. Here's what they have in
common:
·
A direct exchange between two currencies
·
The transaction doesn't include interest
·
The shortest of all transaction timeframes, with
a duration of maximum 48 hours
·
The exchange rate used in FX spot – spot exchange
rate
Foreign Exchange Option (FX Option)
Options fall into the derivatives category (financial
instruments whose values depend on underlying variables). They give people the
right, but not the obligation, to exchange one currency for another at a predetermined
price and date.
Investors are not limited to option trading on Forex, as the
other markets offer this type of trading. However, options trading on
currencies appears to be the most popular due to FX being the most liquid
market globally. According to the Futures Industry Association (FIA), global
futures and options trading grew by 32% to record-setting 21.9 billion
contracts in the first half of 2020 compared to 2019.
#FX options trading takes place over-the-counter (OTC). People use if for both hedging (risk mitigation) and speculation, like CFDs trading.
Foreign Exchange Forward (FX Forward)
FX forward contracts represent agreements between two
counterparts where they agree to carry out a predetermined transaction at a
future date. The transactions consist of one party buying a pre-set amount of
one specific currency for a predetermined amount of another currency.
Usually, there is no exchange of money until a pre-established future date has been arrived at, and that’s the thing
differentiating forward contracts from the rest of the pack.
Forwards can act as a hedging instrument used to manage risks in the investment activity, similar to the other types of FX exchange instruments.
Foreign Exchange Swap (FX Swap)
According to finance-treasury.com, a foreign exchange swap
(FX swap) is not the same as a currency swap.
Foreign exchange swaps (FX swap or Forex swap) function as a
simultaneous purchase and sale of the same amount of one currency for another.
Currency swaps function as an agreement to make a currency
exchange between two foreign parties.
They swap principal and interest payments on a loan taken in one currency for principal and interest payment of a loan of equal value in another currency. Currency swaps can mature in up to 30 years, which can make them suitable on long-term investments.
Foreign Exchange Futures (FX Futures)
FX futures contracts fall into the forward transaction
category. People trade them on special exchanges created for them, and they
boast a duration of up to 3 months. Note that futures contracts include the
interest rate.
An FX future is a futures contract facilitating the exchange
of one currency for another at a pre-set exchange rate and date. Traders use
them for both hedging and speculation purposes.
For historical reasons, the U.S Dollar is always the base currency for #FX Futures, the most traded currency globally (streetdictionary.com).
At CAPEX.com, you can trade CFDs on more than 55 currency
pairs, from majors, minors, and exotic!
The major currency pairs include two of the following
currencies USD, EUR, JPY, CAD, GBP, CHF. Examples: USD/JPY, EUR/USD, GBP/USD.
The minor Currency pairs include one of the currencies
mentioned in Major currency and another currency not mentioned there. Examples:
GBP/CAD, NZD/JPY, EUR/AUD.
Exotic pairs consist of a major currency and an
emerging-market economy currency. Examples: USD/ZAR, EUR/HUF.
Visit our FX page to learn more about trading currencies!
Also, make sure you stay tuned to CAPEX.com Featured Articles
for more educational content!
Sources: investopedia.com, streetdictionary.com,
thebalance.com, finance-treasury.com
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Pertanto, Key Way Investments Ltd non accetta alcuna responsabilità per eventuali perdite di trader a causa dell'uso e del contenuto delle informazioni presentate nel presente documento. Le performance passate non sono un indicatore affidabile dei risultati futuri.