Are you thinking of investing in the fx market? Do you know its various types? Well, as a beginner, you may not be aware of the different types of transactions involved in the market, but to come out as a successful trader, it is our duty to let you inform about types of transaction in forex market.
Every one of us practicing trading business knows it well that fx means switching of one currency to another for an exchange rate. But only a few people know that a number of complicated transaction processes involved in the trading market other than just swap.
“If everyone’s thinking is alike, it means somebody is not thinking.”
When you have made up your mind to invest in the fx business, learning about forex transaction types can be of huge advantage. This will allow you to get a wealth of trading options that can increase your chances of making a profit and minimizes the risks of loss. So let’s start with the types of first –
Forex transaction types – a brief report
- Basic exchange of currency
If you have ever visited a foreign country for travel or business purposes, you must have used cash to buy euros, dollar, yen or any other local currency. The price you paid for buying a currency is called the currency exchange rate.
However, the price or the exchange rate will not remain static. It changes from time to time, especially in respect of the demand of one currency in exchange of another. The demand for currency also gets affected by different factors such recession, the economy of the country, inflation and so on.
- Forward contracts
Most of the business organizations and financial institutions aim at protecting themselves from the financial loss which may occur due to currency exchange. The forward contract is an effective way of doing this where forward contracts are treated as future contracts that ensure traded security. In this type of contract, one party agrees to sell future currency to the other party at the pre-determined exchange rate.
Futures contracts are quite similar to forward contracts except few differences. While a forward contract is specifically designed for the clients based on their current trading situations, a future contract only includes maturity dates and contract size. These future contracts are exchanged only in terms of standard exchange. In a forward contract, the margin is not required whereas; in future contracts margin is required for all traders operating in the future market of trading.
To define swap transaction in forex market, let’s cite an example here – Suppose you have recently shifted your business to Europe and you need euros for continuing your business operations. But you have only dollars that you don’t want to convert in Euros for the fear of facing the loss of money if the market goes in a reverse direction.
Under such a situation, what comes as the best solution? Simple, a currency swap offers the ultimate solution to deal such a situation where you can borrow euros from a currency dealer and lend your dollars. You can continue this process for a specific period. After that, you have to return the Euros and get back your dollars at the pre-set exchange rate.
- Forex option
Fx option is quite like other contracts where traders pay premium amounts for buying or selling trades at a staggering price rate. If the rate of exchange moves in favor the trader before this fx option expires, he or she can earn maximum profit. Similarly, if the exchange rate does not go in favor of the trader and this fx option expires, the trader may incur a loss.
Hope you all get a brief idea about various forex transaction types, and now you can start trading in the market that yields maximum profit in less possible time.
“Invest in yourself or no one else will.”
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.