Currency Trading Transactions 101
Currency Trading a.k.a. Foreign exchange trading or Forex trading is a specialized endeavor. The participants of the same, whether they are full time, part time or moonlighters are therefore considered professionals. As such, they have their own jargon when it comes to Forex transactions.
Forward Contracts
This type of transaction allows traders to create price stability in the face of a volatile market. One party offers to sell a particular currency at a specific price or a determinable price on a future date. This is regardless of the actual value of the currency at the specific or determinable future date. For example, Trader A the seller and Mr. B the buyer agree that US Dollars worth $10,000 will be bought at Euro 25,0000 on January 1, 2010.
Futures
These are standard made or mass produced forward contracts offered to the public in general. The terms and conditions are the same for each contract but the same are made in a series. There is no standard as to the currency, terms, or the maturity date but in most cases, futures average 3 months until maturity.
Options
Otherwise known as an FX options. This involves any contract that allows one party the right but not the absolute obligation to pursue the contract until its perfection. For example, Trader A the seller and Trader B the buyer agree that the latter may purchase from the former US Dollars at 1.433 per dollar on or before January 3, 2011. Come maturity date Mr. B may buy at the pre arranged rate or choose not to exercise the right to buy.
Spot
This is a modified version of forward contracts. As a general rule, these are standardized contracts that are not traded in an exchange. This involves the exchange of two predetermined currencies that are to be swapped with two days. By way of exception, some currencies require a one-day swap. This includes but is not limited to:
- Canadian Dollar
- Euro
- Russian Ruble
- Turkish Lira
- US Dollar
Swap
The most common type of Forex transaction. This involves at least two entities agreeing to buy and sell within a specified period of time. And agree to reverse the transaction within a specific or determinable date. These contracts are not traded in an exchange, and usually require a deposit, in order for one party (prospective seller) to hold the position.
Forex Speculation
In actual practice, this type of transaction happens a lot. However, this type of FX transaction is not merely frowned upon but comes with sanctions and penalties depending on the jurisdiction on which it was committed. Simply put, Forex trading is a transaction that involves traders analyzing raw data in order to catch an upward or downward trend as soon as it begins. Meaning trading starts as soon as the movement becomes apparent. Speculation is an endeavor that is supposed to predict movement even before it becomes apparent and usually involves short transactions repeated over and over again.
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