Financial Instruments Available in the Forex Market

The Forex Market is one of the busiest financial markets in the world with millions and millions of money being traded every day. A lot of Corporates, banks and other foreign exchange institutions play a pivotal part in making the Forex Market a huge success. There are a lot of financial instruments that are made use of, in the Forex market. They are:

1. Spot
2. Forward
3. Futures
4. Swap
5. Option
6. Exchange Traded fund

Spot – This is quickest financial instruments of the Forex market and the tenure of this is only two days. The transaction happens within two days. It is the most voluminous financial transaction in terms of trades processed. A spot price is decided for settlement of a currency or security and the transaction is closed in two business days.

Forward - A forward contract is one of the most sought after financial instruments in the Forex market, because risk can be minimized. Both the seller and the buyer agree to carry out a transaction at a future date and time and there is no financial exchange between the parties until the specified date comes up. On the particular date of the transaction, the goods and services are brought or sold irrespective of the currency trading on that day. Forward contracts are not limited by time. A transaction can be agreed to carry out on a future date which are a few days or a few years later than the current date.

Futures – Future contracts are similar to forward contracts. The only difference between a forward contract and a futures contract is that, in a futures contract, a transaction can be agreed to be carried out at a time, which is not more than 3 months from the current date. There is a time boundary within which the transaction must be closed. The size and the time period of the transaction are fixed in a futures contract unlike a forward contract.

Swap – This is another type of forward transaction. Here both the parties agree to do a currency swap for a specified period of time. They also agree to reverse this swap and revert to their original positions at a future point of time. It is not necessary that a swap transaction has to be carried out only in an exchange. It is just an agreement between two parties. This is one of the most common forms of forward transaction.

Option – Options are rights given to the owners to exchange their currencies to other denomination. However it is only a right and not an obligation for the owner to exchange his currency.

Exchange Traded Fund – They are open ended financial instruments which can be traded anytime during the course of the trading day. These basically follow stock movements or price movements of renowned currencies and then increase or decrease the value of their currency based on the trend of price movements.

However all these financial instruments must be exercised with caution because a slight miss in any of the transactions can lead to huge losses, given the volatility of the Forex markets?