At first, let's find out what currency transactions are like in general.
A currency transaction is a kind of a banking transaction conducted in currency markets. It consists in buying or selling foreign currency. Whom you're dealing with - a broker or a dealing centre - depends on whether or not your trade is passed on to the Forex market. By the way, dealing centres are not fully-fledged currency market participants.
Now we are going to examine each type of a trade in detail.
Currency transactions are subdivided into futures contracts, currency swaps, spots and forward contracts.
A currency swap is a currency transaction in which one currency is bought for another currency and then resold on a later date. A currency swap implies 2 different settlement dates to exchange the currencies. Thus, the first settlement date, the second settlement date and the exchange rate are prearranged before making a trade
"Spot" means an immediate currency transaction, since transactions are conducted as fast as possible, taking no more than 2 business days as a rule. The amount of a contract of buying a commodity, currency or security under immediate delivery terms is also called "spot". The peculiar feature of spot transactions is that payment takes place immediately on the spot date.
A futures contract is a commitment to buy or sell a commodity at a pre-agreed time at a price prearranged today. Remember that a futures contract is a commitment, and commitments shall be fulfilled on due time. In most cases, the commitment is fulfilled through the opposite position, after which a holder of a futures contract exits the commitment. However, the holder may resell the commitment to another person.
Forward contracts are simillar to futures contracts in many ways. A forward contract is an obligation to buy or sell a commodity on a prearranged future date. But, unlike futures contracts, a forward contract is not easy to exit by taking the opposite position because of the lack of agreement between contractors.
So, we have examined the main types of Forex transactions. We hope that this article will help you decide on the nature of your trading and reach new horizons. Remember that the Forex market doesn't tolerate rush and incompetence.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.