Financial Instruments of Forex

Forex market is a complex market. As a trader, you can use numerous financial instruments. Retail traders prefer to use foreign currency options, but banks use more complicated derivatives like options, swaps, forwards and futures contracts. To understand better we are going to explain each of these instruments.

First of all, spot transactions are consider to be an agreement with two choices: buy or sell using a current exchange rate. The currency is exchanged when the time is sign of a spot rate, which is fluctuating constantly depending of the value of how currency moves. If you want to trade this kind of instrument, you have to know that spot transactions have a very high risk because they don’t offer any kind of protections of exchange rates movements. If you want to make profit with this instrument, you would have to buy low and sell high.

Another interesting instrument is represented by forwards transactions were you can buy or sell a foreign currency with settlement no less than 3 days away. If you buy or sell on a short position, you can establish the time and the exchange rate when you close the transaction. This kind of instrument can be used for transaction even a year in advance. The great advantage of this transaction is that you can take advantage of favorable currency exchange rate at an establish date.

On the other hand, there are futures contracts. The main difference between future and forward transactions are that on future contract you can establish the currency amount, maturity date and interest amount. The period of this kind of contract is 3 months.

For swap transactions, there is a different situation because one currency is exchanged for another currency on a specified length of time. The difference between two exchange rates determine the swap price.

On top of these instruments, you also have a few more options to trade a currency. To protect yourself of losing you should  have a plan and know very well how the market works.

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