Forex Financial Instruments

Financial instruments

Financial instruments are monetary contracts between parties. It can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond).

Forex Financial Instruments. 

The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. The common Forex Financial instruments are

Spot, Forward, Swap, Futures, Options.

Spot

Spot trading is one of the most common types of forex trading. The spot market also called as cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. In spot markets, spot trades are made with spot prices. This varies from a futures market, since a futures contract is a based on delivery of the underlying asset at a future date.

Forward

A forward market is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. Forward markets are used for trading a range of instruments, but the term is primarily used with reference to the foreign exchange market. It can also it can also apply to markets for securities and interest rates as well as commodities. One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.

Swap

The most common type of forward transaction is the foreign exchange SWAP. A swap is a derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.

Futures

A futures market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly three months. Futures contracts are usually inclusive of any interest amounts. Currency futures contracts are contracts specifying a standard volume of a particular currency to be exchanged on a specific settlement date. Thus the currency futures contracts are similar to forward contracts in terms of their obligation, but differ from forward contracts in the way they are traded. They are commonly used by MNCs to hedge their currency positions. In addition they are traded by speculators who hope to capitalize on their expectations of exchange rate movements.

Option

Options are a financial derivative sold by an option writer to an option buyer. A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.