Ways of Trading Forex
This is one of the most common types of instruments in the foreign exchange market, where currencies are traded in pairs, and standard quantities called lots.
FX Forward Contracts
This instrument is mainly used by importers and exports to hedge their currency exposure. Forward contracts are an agreement between the buyer and the seller to exchange currencies at a known price in the future, regardless of market prices on that date. The duration of the contract may be one day, several days, months, or years. Forward Currency agreements are negotiated and agreed upon, between both parties.
In currencies swaps, both parties exchange currencies for a certain period and agree to exchange back the currencies, at a later date. These contracts are not standard contracts and are not traded through an exchange. A deposit payment is often required to keep the deal open until it has been closed.
These contracts are similar to Forward Currency contracts and are often traded on an exchange. The average duration of the contract is roughly three months. Futures often include interest-bearing money.
Currency futures determine a specific amount of currency to be exchanged, at a specified settlement date. Thus, Currency futures are like Currencies forwards regarding their obligations; but, they differ from forwards in the way they are traded. Futures are traded on an exchange, while forwards are traded over-the-counter (OTC).
They are derivatives from the spot forex market price or similar market where the owner has the right, but not the obligation, to exchange one currency for another currency, at a predetermined exchange rate, on a specified date.