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Types of deals on Forex
Written by: PaxForex analytics dept - Wednesday, 13 March 2019 0 comments
Thanks to currency purchase and sale transactions, global economic settlements between countries are carried out, and international projects, insurance operations, as well as speculative trading transactions are financed. All types of settlements in foreign currency, including the issuance of foreign loans, are also considered to be foreign exchange transactions.
According to the method of settlement of transactions in the foreign exchange market are classified as urgent (forward) or cash (spot). So:
Swap (sometimes the term “currency swap” is used) is the most common subspecies of a forward currency contract, during which a currency is simultaneously bought / sold for the same amount with different valuation dates (final settlement).
Other currency swap names are used: overnight or rollover. Usually such operations are carried out by banking institutions and international financial organizations. The concept of a brokerage swap for forex trading has some differences, which allows traders to earn extra money.
Spot - currency contracts for currency exchange at the current rate, but with the actual delivery within two banking days, which means mutual balance operations in currencies at the time of the conclusion of the contract, and the money goes to the accounts after 2 days. The exception is the spot settlement for the Canadian dollar, which is carried out only on the day of the transaction.
Usually, when people talk about the exchange rate, they mean the spot rate. Two thirds of the total volume of transactions in the financial market falls on such operations. Urgent transactions are carried out according to the rules of over-the-counter trading, that is, a direct contract between the parties, as opposed to speculative trading on the exchange, in which the price is determined by the method of market auction.
Forward transactions - urgent currency deal when the delivery of currency is set to some future date at some fixed rate. It is mainly used as a method of insuring risks, protecting importers from the influence of market exchange
rates on prices. The forward rate is calculated as the ratio of interest rates on the loan multiplied by the spot exchange rate.
Forwards work in the over-the-counter or interbank foreign exchange market can be the object of sale for profit, which allows speculation by forward contracts, relying on the favorable difference between the actual and forward rate. In the real economy sector, the exchange rate is fixed by forward transactions and allows for more efficient financial management.
Futures are called exchange currency contracts concluded today with the date of execution of the contract (value) after a certain period on the same conditions. They are characterized by standardized deadlines (3-6 months) and standard volumes. Before the end of the transaction, the buyer must carefully monitor the course of the financial instrument in order to resell his obligations when there is a risk of losses. They are also used to hedge losses and risks.
Option - when concluding currency transactions of this type, the buyer acquires the right, but not the obligation, to buy currency in certain amounts at a pre-fixed value. At any time, the transaction can be canceled at the option holder’s option. It can be raw, commodity or index.
TOD - the easiest transaction in the foreign exchange market, the calculation for which is carried out on the current banking day: the delivery of currency by the buyer is immediately paid by the seller.
TOM - a deferred (delayed) currency transaction, when settlements on it are postponed to the next banking day.
The majority of Forex participants work precisely with spot transactions and underestimate the importance of other types of foreign exchange transactions. The financial market functions as a single mechanism in which resources flow freely between tools in search of more profitable options with minimal risk. It is worthy to learn them, use and earn more as a result.