Types of conversion operations
The essence of all forex transactions are very tightly intertwined with the terminology of the financial instruments. In all financial markets – foreign exchange market , the commodity market ( precious metals, oil ) on the market of securities (stocks , bonds ), and the credit market , the concept of financial instruments implies – different methods of financial operates .
Conversion operation is called Forex market transaction at a predetermined amount of currency exchange of one country ‘s currency for another country on a specific date at a fixed quote. The main difference of conversion transactions in the Forex market is the value date , ie the date of delivery of the currency in relation to the date of the purchase / sale of foreign currency . It is for this difference all exchange operations in the Forex market are divided into two types :
Operations such as spot or the current currency conversion .
Forward exchange operations .
Most Forex common operations such as the spot .
The value date of the operation type spot , all the world is considered to be the 2nd working day after the transaction . The reason is that due to such conditions counter parties (members ) of the transaction is very convenient for the current and the next working day to process all the necessary documentation and arrange the necessary vouchers . It should be noted that such a market , where currency is exchanged on the current( spot ) quotes are called spot market . Also it should be noted that this method of settlement for transactions such as spot is suitable only for serious participants of the Forex market . For the rest of the members of the market – traders who work in the Forex market thanks to the Internet , all transactions are lightning fast, with a single click of a computer mouse button . In these deals while value date loses its meaning, because the trader’s account shows the current status of its work on the Forex market.
To forward exchange operations usually attributed forwards , futures , options and swaps. In addition, they are called derivatives . The main task of these financial instruments is to reduce the possible risks from changes in the Forex market quotations in the future. For those who aspire to earn on Forex via the Internet, these financial instruments are not much will be able to help. However, they will still be considered to understand the types of picture conversion operations in general.
Forward contracts – conclude participants in the transaction , subject to exchange a certain amount of currency at a pre- specified quotations at a predetermined date . The transaction is committed in any case , it does not really matter what the current spot prices will be in the Forex market at the time value date. The amount quotes and date of the transaction value date can be absolutely any – regardless of the agreement, which will come counter parties .
Demonstrate the advantage of forward contracts in Forex can be in this sample :
Let’s say a company to make the purchase of equipment for U.S. dollars abroad. Suppose that at the moment the company has the amount required to perform the operation, but she expects her income to the account in the near future. In addition , there is a strong possibility of exchange rate changes in an unfavorable direction for themselves , ie expected to rise in the dollar. In such circumstances, the company should enter into a forward contract with a bank for the purchase of the required amount of U.S. dollars with a maturity date of one month at the best quotes for the company . Of course, the bank can not agree to such terms in the event that he also expects the appreciation of the U.S. dollar. Therefore , forward transactions , in addition to minimizing risks , and can be the source of lost revenue . Thus, if in the above example , the dollar after a certain time does not go up as expected , but on the contrary will fall in price , the company is sure to incur a loss .
The main difference between futures on forward contracts are standard maturities ( value date ) and set the size of the currency. Due to this feature , they can be sold as ordinary securities. Futures trading in the Forex market is a separate market – the futures market. Duration of treatment futures in such a market is estimated about 3 months.
Options have much in common with futures , but weaken the commitment of one of the contracting parties. For example, if the acquisition of the futures you just have to make a deal on pre- agreed conditions , in the case of an option , you can cancel the transaction at your convenience. Working with options also performed on a separate market – the options market.
Swaps – kind of conversion operation . The main feature – the parties enter into a transaction of purchase / sale of a certain amount of currency with a prerequisite to conclude a reverse transaction after a specified period of time.
Swaps – are considered not standardized contracts , so they do not have their individual market .
Finally , I would like to say that out of all of the conversion operations ( financial instruments) for a private trader who enters into transactions over the Internet, it is best to pay attention to the type of operation the spot on the spot market .