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Types Of Forex Instruments You Can Trade

March 7, 2013 0 Comments

Before going into Forex financial instruments in particular, it is helpful to understand the concept of financial instruments and getting some education. Financial instruments most frequently refer to a funding medium that can be traded. Financial instruments are commonly categorized into two categories: cash instruments and derivative instruments.

Cash instruments are financial instruments in which both borrower and lender have to agree on a transfer. Examples for such financial instruments are securities, loans, and deposits. These are readily transferable and their value is determined directly by the market.

Derivative instruments derive their value from other financial instrument or variable. They are commonly divided into two further categories: Over the counter (OTC) derivatives and exchange-traded derivatives.

Financial instruments can also be categorized by ‘asset class’. Such categorization depends on whether they are equity based or debt based. Equity based means that the investor has ownership of the asset, whereas debt based means that the investor needs to take out a loan.

Forex instruments and transactions are neither debt nor equity based. They have their own category in which: standard derivatives are Foreign Exchange futures; OTC Derivative are Forex Options, Forex Forwards, Currency Future; and cash instruments are spot, Foreign Exchange.

Let’s have a look at some specific Forex financial instruments:

  • Forex Forwards is a transaction in which money does not actually change hands until a specific (and a previously agreed-upon) future date. In this case, the exchange rate is one upon which the buyer and the seller have agreed, and it is not necessarily based on current market rates. The most common type of a Foreign Exchange
  • Forwards transaction is Currency Swap. In a Currency Swap, currencies are exchanged for a certain (previously agreed-upon) amount of time. At the end of which the transaction is reversed. Currency Swap is not traded via an exchange.
  • Currency Future is a transaction with contract and a maturity date (usually of three months). Futures are standardized and are traded via an exchange and usually include an interest amount.
  • Spot Forex is a two-day “maturity” transaction. Two currencies are traded in the shortest timeframe, with cash (rather than a contract) and without an interest.

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