The Main Instruments For Foreign Exchange Trading

The main instruments for foreign exchange trading include both traditional products such as spot, forwards and swaps, and more exotic products such as currency options and currency swaps. The beauty of the foreign exchange market is its ability to accommodate new products, for instance currency options come in all shapes and sizes, all tailor made to serve a specific purpose.

The products used today are described as:

• Spot – a single outright transaction involving the exchange of two currencies at a rate agreed on the date of the contract for value or delivery (cash settlement) within two business days.
• Forward – a transaction involving the exchange of two currencies at a rate agreed on the date of the contract for value or delivery at some time in the future (more than two business days).
• Swap – a transaction which involves the actual exchange of two currencies (principal amount only) on a specific date, at a rate agreed at the time of conclusion of the contract (the short leg) and a reverse exchange of the same two currencies at a date further in the future, at a rate agreed at the time of the contract (the long leg).
• Currency swap – a contract, which commits two counterparties, to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
• Currency option – a contract, which gives the owner the right, but not the obligation, to buy or sell a currency with another currency at a specific rate during a specific period.
• Foreign exchange futures – this is a forward contract for standardised currency amounts and for standard value dates. Buyers and sellers of futures are required to post initial margin or security deposits for each contract and have to pay brokerage commissions.