For anyone involved in trade transactions on foreign exchange exchanges, the acquisition or sale is a combination of two types of economic relations at once. So, the operation is performed both in relation to the owner of claims for one banknote, and to the debtor in another. As a result of such actions assets and liabilities market players include a variety of foreign banknotes, the quotes of which vary, which creates the likelihood of profit (or loss) on transactions.
Currency position
Consider its two types. A foreign exchange position may be closed when the requirements are the same as obligations for a specific foreign currency unit. Moreover, this parity must satisfy the requirements of cost and time. In those circumstances where obligations and requirements are not identical, the currency position is called open. There is another option. A closed currency position implies the existence of zero risk, while an open currency position is constantly accompanied by positive currency risks.
Risky currency positions
They can be of two types. A long foreign currency position is characterized by a predominance of foreign currency claims over liabilities and is also called a net asset. Short implies the existence of the opposite situation, when the obligations are greater than the requirements. This option is also called net liability.
In a broad sense, a foreign exchange position is a combination of funds in foreign currency, forming the assets and liabilities of a participant in trade transactions. This takes into account both claims outside the balance sheet and liabilities for those transactions that are not yet finally closed. It can be said that assets and liabilities in a variety of foreign banknotes form bonds in which there are or are no currency risks of profit and loss in case of changes in quotes of different currency units.
Bank currency position
There is such a term as the currency position of the bank. It can also be open or closed. A bank’s closed position is a situation where the requirements and obligations of the institution in a particular foreign currency are identical. An open foreign exchange position of a bank (or as the term OCP is also called) appears in circumstances when the amounts of assets and liabilities of a financial institution for a specific foreign currency unit do not coincide. In this case, the difference between the requirements and obligations in this currency is the AFP.
It should be added that the open foreign exchange position of the bank can also be long or short. The first occurs when the bank bought more individual foreign currency notes than it sold. A short open foreign exchange position appears in the exact opposite situation, that is, when a financial institution acquired less than a specific foreign currency unit than it sold.
Cash transactions
Cash Transactions - these are conversion operations, in which settlements between counterparties must be made within two business days after their implementation. The settlement date for such a transaction is called value. There are three types of such transactions. Today, or calculations today, as well as situations where the date of the transaction coincides with the value date. Tomorrow, or calculation tomorrow. Spot - calculations the day after tomorrow.
Derivatives transaction
Another type of foreign exchange agreement is called a derivatives transaction.In their implementation, the calculations exceed two working days from the moment of their conclusion. Today on the world foreign exchange market There are a large number of different instruments for derivatives transactions, and options for simpler mechanisms are common on domestic exchanges. The most common derivatives instruments for conducting transactions in the foreign exchange market are forwards, options, swaps and futures.
Forwards, futures and options
Forward forward conversion operations are a contract between two counterparties on the process of buying and selling a foreign currency unit under specific conditions. Such an agreement is signed outside the exchange. In terms of its characteristic features, such a contract is individual, and at the moment this type of relationship between the parties in Russia is extremely poorly developed.
A futures contract is an agreement between participants on the sale of foreign currency. Such an agreement is concluded with the participation of the exchange, which should provide conditions that are standard for any underlying asset. Fulfillment of obligations on futures is guaranteed by the exchange itself. After the conclusion of the agreement between the parties, the contract is registered in the clearing house of the exchange. At the time of registration, the exchange receives the status of one of the parties to the transaction. The standardization of such contracts determines their high liquidity.
In practice, this means that one participant in trading operations in the foreign exchange market has the opportunity to close an open foreign exchange position through a counter transaction. At the same time, a participant who wants to complete the supply of currency according to his obligations has the opportunity to leave his position until the date of the transaction. At the same time, it should be emphasized that in the practice of the world currency markets there are infrequent situations where futures contracts end with the actual delivery of the underlying asset.
In situations where the investor is convinced of the assessment and analysis of the dynamics of behavior currency quotes in the market, it is best to enter into a forward or futures contract. However, there are situations when it is not possible to predict the market situation with high accuracy. Then it’s advisable to take advantage of the opportunity to make transactions called option. it type of contract makes it possible to limit the risk to a fixed amount, or premium.
An option is this type of contractual relationship between market participants, when one of the parties is given the opportunity to choose. He can either fulfill the agreement or refuse to fulfill it within the specified time. In other words, the option is one of the varieties of derivatives, which consists in signing a contract for the sale of an underlying asset between the parties on certain conditions. But an additional buying party is given the opportunity to refuse to fulfill the contract by paying a premium to the seller for this decision.
Swaps
A swap is an agreement of the participants of the foreign exchange market on the mutual exchange of payments in accordance with the conditions fixed in the agreement. That is, a currency swap is a kind of barter of the nominal value of banknotes and interest on the face value and interest in another currency.
Currency Position Size
The limit of a foreign exchange position is nothing but the maximum permissible ratio between the value of an open foreign exchange position and total capital. To monitor compliance with limits, a financial institution will convert all values of open currency positions for certain foreign banknotes into the equivalent of the national currency at the quotes established by the national bank on a specific date. In addition, the bank must adhere to the limit in national currency.The value of this open position is calculated as the difference between the aggregate of all long and short open currency positions in the equivalent of the national currency.
