In this article I have explained about different financial instruments that are used in the trade of currency in foreign exchange market.
Spot
A spot transaction is a name given to a two-day delivery transaction (except in the case of trades that takes place between the US Dollar, Canadian Dollar, Turkish Lira and Russian Ruble, by which the next business day is settled), as opposed to the futures contracts, that takes place usually in three months.
A “direct exchange” between two currencies is represented by this trade, it has the shortest time frame, rather than a contract cash is involved; and interest is excluded from the agreed-upon transaction. The data for this study has been taken from the spot market. By volume among all FX transactions, Spot transactions has got the second largest turnover after Swap transactions in the Global FX market.
Forward
In order to deal with the foreign exchange risk there is one way and that is to engage in a forward transaction. In this type of transaction, money does not actually change hands until some agreed upon future date.
For any date in the future a buyer and seller agree on an exchange rate, and then on that date the transaction takes place, regardless of the current market rates at that time when the transaction takes place. The duration of the trade might be a one day, a few days, months or years. Usually both parties decide the date.
Future
Foreign currency futures are exchange traded forward transactions having standard contract sizes and maturity dates, for instance, $1000 for next November at a rate that is already agreed by both parties.Futures are standardized and their trade takes place on an exchange that is created for this particular purpose. It is a rough estimate that the average contract length is 3 months. Any interest amounts are usually included in futures contracts.
Swap
The type of forward transaction that is most common is the currency swap. In a swap, exchange of currencies takes place between two parties for a certain length of time and it is agreed by them to reverse the transaction at a later date. These currency swap are not standardized contracts and their trade does not take place through an exchange.
Option
A foreign exchange option which is commonly referred in short as FX option is a derivative where it is right but not the obligation of of the owner to exchange money denominated in one currency into another currency on a specified date at a exchange rate that is pre-agreed. The FX options market is considered to be the deepest, largest and most liquid market for options of any kind in the world.
Exchange-Traded Fund
Exchange-traded funds (or ETFs) are open ended investment companies and traders can trade them at any time throughout the course of the day. Typically, ETFs try to exactly copy a stock market index such as the S&P 500 (e.g., SPY), but recently they are now making exact copies of investments in the currency markets with the ETF increasing in value at the time when the US Dollar weakens versus a specific currency, such as the Euro. The price movements of world currencies versus the US Dollar is tracked by certain of these funds, and increase in value directly counter to the US Dollar, that allows for speculation in the US Dollar for US and US Dollar denominated investors and speculators.
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