Financial instruments for Fx Trading

You can speculate and make money from trading positions on the FX platforms through an array of financial instruments and markets.

The difference types of FX platform orders are explained below.

Spot Transactions

A Spot transaction is a basic two-day order whereby the currency transaction that you make will be settled in two days.  Spot transactions are reduced to just one business day in the case of trades between the US Dollar, Canadian Dollar and Russian Ruble.  Spot transactions represent a direct trade between two currencies, and involves cash rather than a contract.  We could compare a spot transaction (which has the shortest time frame) with a future contract, which may last up to 3 months or a year.

Forward Contracts

Because foreign exchange markets can be quite unpredictable, you can negotiate in forward contracts whereby you set a date for a currency transaction at a future date.  The currency exchange is set today’s market rates.  This reduces the risk in case the value of the currency you are exchanging with sky rockets.  The downside to futures contracts of course is that the value of your exchange currency could rise, meaning you lose out overall.  The duration of the trade can be one day, one week, a few months or even a year.  It is decided between the two parties based on contractual agreement.  Sometimes you can even sell on your forward contract if you want to cancel the transaction early.

Swap

A currency swap is the main type of forward currency transaction.  Both parties agree to exchange/swap currencies for an agreed period of time and will reverse the transaction at a later date.  Swaps are not standardized contracts and aren’t traded through an FX exchange.

Futures Contracts

Futures contracts are found in many markets, such as futures trading and spread betting.  Foreign currency futures are forward contracts with a contractual maturity date at a pre-agreed exchange rate.  For example, exchanging 1,000 US Dollars to Pound Sterling in 3 months time.  Hedge funds and positional traders tend to work with futures a lot because they can make a profit from increases in exchange rates.  If they think the exchange rate value of the Turkish Lira will rise than they can invest in a futures contract that settles when the Lira hits its peak.

Foreign Exchange Option

FX options give the owner the right (but not the obligation) to exchange money into another currency at a pre-agreed exchange rate on a specified date.  The FX options markets are the busiest and most liquid in the world, and it is where the majority of FX transactions take place.

Be Sociable, Share!