Foreign exchange transactions are operations in which securities are exchanged in one currency for securities in another currency. In this case, the course is agreed in advance on a specific date. There are several types of currency contracts. First of all, cash or cash transactions should be noted. Such operations, which are also called spots, are performed based on current prices. In the course of these transactions, within two days or immediately for one currency, another is acquired.
Types of transactions
In addition to the type of transactions described above, there are others. For example, urgent, or forward transactions. In the process of such operations, the acquisition or sale of a currency occurs at the rate established at the time of conclusion of the agreement. At the same time, when implementing a forward transaction, the term for which it is concluded is immediately stipulated, and at the end of which the currency is transferred. Swap transactions represent the acquisition of monetary units on a spot basis. At the same time, the currency is exchanged for another with the obligation to redeem it in the future after a specific agreed period of time.
Urgent foreign exchange transactions
The main types of futures transactions include forward, currency futures and option. Let's consider them in more detail. Forward is a binding contract concluded outside the exchange. As a rule, such operations are carried out with the aim of making the actual sale or purchase of the relevant monetary units with delivery in the future at a time interval agreed upon by the parties. In addition, forwards may be concluded with the intention of hedging, that is, insuring their currency risks.
Forwards can be single, and then they are called outright, or included in a variety of combinations. An example of a second type is a swap. By the way, it will be emphasized that for transactions such as forward fixed rates of buying and selling foreign currency. In other words, the forward market is bilateral. It is distinguished by low liquidity and closed prices.
Futures contracts
Futures are called exchange contracts that have standard characteristics. These include the amount of the contract, as well as the term and procedure for settlement between the parties. Futures are traded exclusively on the exchange. At the same time, it is imperative that certain and identical rules are observed for all bidders. It should be noted that when organizing the currency futures, both the seller and the buyer enter into relevant agreements with the exchange, and transactions are settled through the clearing house of the trading platform. This procedure guarantees participants in operations the fulfillment of all obligations under the agreements.
When concluding such transactions, the seller is responsible for the delivery of the standard currency amount, and the buyer of the currency futures must pay it at the rate fixed at the time of the transaction. At the same time, it should be emphasized that one of the key features of futures is a small share of real currency supplies. It is approximately 1-2% of the number of all agreements concluded on the exchange. In most currency transactions of this type, open positions are then closed by means of counter-transactions of the same amount.
Deal option
A feature of the option is that it is not a solid, or binding, derivatives transaction, as is the case with currency forwards and futures. In practice, this is as follows.The buyer of the option has the opportunity to choose either to exercise his right and execute the transaction in accordance with the terms of the option agreement, or to leave the contract without performance. Provided that the buyer of the option still decides to execute the contract, the seller receives a bonus reward, which will remain with him regardless of the fact of exercise of the option.
The advantage of the option compared to forward transactions and futures is the possibility of insurance against unfavorable market currency exchange rate fluctuations. In addition, options allow you to effectively use these changes to make a profit.
Foreign exchange and traditional futures
Work with both ordinary and currency futures consists in using the general principle: according to the concluded agreement, the sale or purchase of a certain amount of an asset at a set price is made at a predetermined time. The main difference between traditional and currency futures is that they do not centrally trade currency futures. Similar transactions are concluded at various trading floors in the United States of America, as well as outside this state. By the way, it will be emphasized that trading for the most part of currency futures is held on the Chicago Mercantile Exchange.
At the same time, one interesting point should be noted regarding futures. Foreign exchange transactions under such contracts outside the US jurisdiction are also legal, as they are subject to a number of restrictions and certain rules. It is also worth paying attention to the fact that, unlike the spot currency market, absolutely all currency futures are quoted against the US dollar.
Areas of use for currency futures
The two main areas of application for a currency pair futures are speculation and hedging. The use of currency futures in hedging makes it possible to reduce or completely eliminate the risk caused by sudden changes in the exchange rate. The purpose of speculation is to get the greatest profit through the use of differences in exchange rates.
Futures Currency Hedging
The strategy of using such a tool as hedging when working with currency futures is very popular among traders. And there are a number of reasons for this. First of all, this tool is used to reduce or eliminate risks caused by rapid price changes. And this, in turn, is reflected in sales revenue. We give an example. A retailer in the EU wants to know the exact amount of profit expressed in US dollars. To this end, the company makes the purchase of a futures contract, the value of which is equal to the expected profit of the retail network.
In addition, you should pay attention to the fact that when using hedging, the trader has the opportunity to choose between futures and forward transactions. These tools differ from each other in a number of characteristics. So, forward contracts are not limited by the size of the transaction and time. This feature provides the opportunity to adjust the contract if necessary. At the same time, when working with futures, such a right is absent. Futures contracts have a fixed size and execution date.
Payment for a forward transaction is made after the expiration of its implementation. Settlement for such operations occurs every day. It should also be noted that using hedging of currency risks by futures, the trader has the opportunity to reassess his own positions as often as necessary. But when using forwards, this is not possible, and you will have to wait for the transaction to expire.