The following are some of the most common types of foreign currency hedging vehicles used in today's markets as a foreign currency hedge. While retail forex traders typically use foreign currency options as a hedging vehicle. Banks and commercials are more likely to use options, swaps, swaptions and other more complex derivatives to meet their specific hedging needs.
Spot Contracts - A foreign currency contract to buy or sell at the current foreign currency rate, requiring settlement within two days.
As a foreign currency hedging vehicle, due to the short-term settlement date, spot contracts are not appropriate for many foreign currency hedging and trading strategies. Foreign currency spot contracts are more commonly used in combination with other types of foreign currency hedging vehicles when implementing a foreign currency hedging strategy.
For retail investors, in particular, the spot contract and its associated risk are often the underlying reason that a foreign currency hedge must be placed. The spot contract is more often a part of the reason to hedge foreign currency risk exposure rather than the foreign currency hedging solution.
Forward Contracts - A foreign currency contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period.
Foreign currency forward contracts are used as a foreign currency hedge when an investor has an obligation to either make or take a foreign currency payment at some point in the future. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched up, the investor has in effect "locked in" the exchange rate payment amount.
* Important: Please note that forwards contracts are different than futures contracts. Foreign currency futures contracts have standard contract sizes, time periods, settlement procedures and are traded on regulated exchanges throughout the world. Foreign currency forwards contracts may have different contract sizes, time periods and settlement procedures than futures contracts. Foreign currency forwards contracts are considered over-the-counter (OTC) due to the fact that there is no centralized trading location and transactions are conducted directly between parties via telephone and online trading platforms at thousands of locations worldwide.
Foreign Currency Options - A financial foreign currency contract giving the buyer the right, but not the obligation, to purchase or sell a specific foreign currency contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign currency option buyer pays to the foreign currency option seller for the foreign currency option contract rights is called the option "premium."
A foreign currency option can be used as a foreign currency hedge for an open position in the foreign currency spot market. Foreign currency options can also be used in combination with other foreign currency spot and options contracts to create more complex foreign currency hedging strategies. There are many different foreign currency option strategies available to both commercial and retail investors.
Interest Rate Options - A financial interest rate contract giving the buyer the right, but not the obligation, to purchase or sell a specific interest rate contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the interest rate option buyer pays to the interest rate option seller for the foreign currency option contract rights is called the option "premium." Interest rate option contracts are more often used by interest rate speculators, commercials and banks rather than by retail forex traders as a foreign currency hedging vehicle.
Foreign Currency Swaps - A financial foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate. The buyer and seller exchange fixed or floating rate interest payments in their respective swapped currencies over the term of the contract. At maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies. Foreign currency swaps are more often used by commercials as a foreign currency hedging vehicle rather than by retail forex traders.
Interest Rate Swaps - A financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most common swap contract is the fixed-to-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure.
John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage
The Foreign Exchange Market ? better known as FOREX -... Read More
So you have learned how to trade the markets by... Read More
Have you noticed that when someone's trying to sell you... Read More
The following situation happens quite often to many traders. Look... Read More
The simplest definition of currency trading is the practice of... Read More
For those unfamiliar with the term, FOREX (FOReign EXchange market),... Read More
The psychological aspect of trading is usually underestimated by those... Read More
One of the best kept secrets in trading is that... Read More
What is arbitrage? Arbitrage is the simultaneous buying and selling... Read More
A Minister of Finance is morally right to lie about... Read More
To trade on the forex market, the largest financial market... Read More
Foreign exchange currency trading is also known as Forex trading,... Read More
During my first year as a local (independent trader) on... Read More
Below I will describe three basic principles that may come... Read More
Cut your losses short and let your profits run. This... Read More
Forex, or Foreign Exchange, is the simultaneous exchange of one... Read More
All professional traders have a trading plan. Trading futures is... Read More
For the first time in several years the U.S. dollar... Read More
Foreign exchange trading is the trading of currencies. Most currencies... Read More
One can learn forex trading as easily as one would... Read More
QUESTION: If the SP futures fall through support and go... Read More
I received an email this week with a question (below)... Read More
To make a profit, in the FOREX, a trader can... Read More
There are lot's of Forex signals providers out there. New... Read More
Everyone trades a little differently. The trading method outlined below... Read More
You may be asking yourself "how does one begin to... Read More
Money management determines how much to risk on each individual... Read More
Most traders use a FOREX broker to handle their transactions.... Read More
Are you thinking of entering the fast-paced world of day... Read More
Currencies are traded in dollar amounts called "lots". At 100:1... Read More
We all know when you go on a trip to... Read More
IntroductionThe exchange rate refers to the value of the US... Read More
I am reading a fantastic book on trading, first published... Read More
I read on a bulletin board a traders comment that... Read More
Everybody hates to lose and unfortunately no one is blessed... Read More
For those of you who are interested in forex trading,... Read More
The simplest definition of currency trading is the practice of... Read More
What Is Online Futures Trading?A futures contract is an agreement... Read More
FEARING LOSSESThere is a huge difference between being risk averse... Read More
My father, who owns a small parts store and garage... Read More
The recent upheavals in the world financial markets were quelled... Read More
Are you thinking of entering the fast-paced world of day... Read More
Profitable day traders recognize that momentum trading is among the... Read More
Have you noticed that when someone's trying to sell you... Read More
Forex trading online is a fast way to use your... Read More
One way to acquire discipline in trading..."Hey Joe! When you... Read More
The forex options market started as an over-the-counter (OTC) financial... Read More
I remember the first time I started to trade online.... Read More
During my first year as a local (independent trader) on... Read More
Day trading is all about making buy and sell decisions.... Read More
There are many advantages to Trading FOREX as your main... Read More
International commerce has rapidly increased as the internet has provided... Read More
When day trading the SP and Nasdaq futures, do you... Read More
To trade on the forex market, the largest financial market... Read More
FOREX is the abbreviation for the Foreign Exchange market. FOREX... Read More
What is Stocks Trading?Companies throughout the world issue new stock... Read More
The business world is a complex web of supply and... Read More
What are Forex signals? Forex signals are paid services offered... Read More
For those unfamiliar with the term, FOREX (FOReign EXchange market),... Read More
There are some common mistakes I've seen traders make in... Read More
The psychological aspect of trading is usually underestimated by those... Read More
Are you looking into a career in day trading? In... Read More
There is one very important factor that you should consider... Read More
In recent years, investors have witnessed increased number of investment... Read More
You may be asking yourself "how does one begin to... Read More
A Minister of Finance is morally right to lie about... Read More
Currency Trading |