Foreign Exchange Financial Instruments

The foreign exchange financial instruments are transactions or contracts conducted in the spot, forward, swap, futures and options foreign exchange markets. These transactions has a life span of zero, one day to months or years. A spot forex transaction is a two day delivery transaction. This trade is a direct exchange between two currencies in cash and has the shortest time frames and interest is not involved. This is the type of forex trading that is common among forex brokers and is called spot forex trading, a small fee known as roll over fee or swap fee is usually charged to renew expiring transactions for continuation. In order to deal with forex risks forward transactions are done. This type of transaction can take place from one day to days, months or years. It does not involve physical cash until the final date of the contract agreement. Both parties must have an agreed exchange rate and date of transaction and these transactions must occur regardless of the exchange rate. A swap forex transaction is a common type of forward transaction. In swap transactions, two parties are involved. They exchange currencies for a particular length of time and also make agreement on which day or date they will reverse such transaction. This is a standard contract that cannot be traded through an exchange. It normally require a deposit to hold the position open until the transaction is completed. Hence, futures are standard contract usually traded on an exchange, they are a 3 months contract and usually involved interest amounts. They have a specified volume of currency and date of settlement. They are similar to forwards contract in terms of obligation. But are different from forwards contract by the way they are traded. They are used to hedge currency positions and are traded by speculators who hope to capitalize on their expectations of forex movements. Furthermore, in forex, options are derivatives whereby owners have the right but no obligation to trade money in the currency to another currency at a pre-agreed exchange rate on a specified date. The forex options market is the deepest, largest and most liquid market for options of any king in the world. Finally, the forex market can be traded on different financial instruments that are spot, forward, swap, futures and options.