Forex Trading Transactions
Forex Trading Transactions
Forex trading transactions come in different forms. Currency investors have a number of options to choose from in terms of trading in the foreign exchange market. Here are just some of them.
Spot Transaction- this type of transaction is usually a two-day delivery transaction. This simply means that such transactions can be done in as short as two days. This form of forex trading transaction is usually characterized by a “direct exchange” between two currencies that have the shortest time frame. Spot transactions usually involve cash rather than a contract between the two parties. Spot transactions are considered to have the largest share by volume in all foreign exchange deals made regularly.
Forward transaction- this type of foreign exchange transaction usually takes longer and involves an agreed upon contract between two parties making the deal. In this type of transaction, currencies do not actually change hands until the agreed future date. A buyer and a seller both come to terms upon an agreed exchange rate for any date in the future. With this agreement on hand, the transaction that occurs on the said date, follows the exchange rate agreed upon by both parties, regardless of what the prevailing foreign exchange rates are in the market. The duration of a forward transaction can be as short as a few days or it can take months or even years. Dealing in forward transactions is one way of trying to minimize foreign exchange risk.
Currency future- foreign currency futures are actually forward transactions, but with standard contract sizes and maturity dates. A currency future usually states an agreed upon amount to be traded on an agreed rate at an agreed time. Currency futures are usually standardized and can be seen traded on an exchange that is created for dealing with this kind of transaction. The average contract length for currency futures is about three months and is usually inclusive of any applicable interest rates.
Forex swap- another type of forward transaction, the forex swap is also considered as the most common of all forward transactions. In this type of forex trading transaction, two parties agree to exchange currencies for a certain period of time and agree to reverse the transaction at an agreed later date. Forex swaps do not make use of standardized contracts. And unlike currency futures, forex swaps are not traded through an exchange. This transaction may be done between parties who might be in need of a certain currency amount for a certain time only and may need it now.
