Types of Foreign Currency Hedging Vehicles

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

In The News:


pen paper and inkwell


cat break through


10 Steps To Professional Day Trading

Everyone trades a little differently. The trading method outlined below... Read More

A Beginner?s Guide to FOREX

FOREX is the abbreviation for the Foreign Exchange market. FOREX... Read More

A Look at Online Forex Brokers

An online forex broker is a firm that facilitates retail... Read More

Crisis of Confidence in the EU

The European Union (EU) constitution was dealt a double blow,... Read More

6 Critical Factors For Successful Trading

Success in any profession can be broken down into a... Read More

Ways to Acquire Discipline in Trading

One way to acquire discipline in trading..."Hey Joe! When you... Read More

Business and the Forex

The business world is a complex web of supply and... Read More

What are Your Options Regarding Forex Options Brokers?

Forex option brokers can generally be divided into two separate... Read More

Forex Market Overview

"FX" is an abbreviation of "forex" or "foreign exchange." Foreign... Read More

A Short Introduction To FOREX

FOREX is the world's largest and most liquid trading market.... Read More

Momentum Trading: A Practical Day Trading Strategy to Get Profits from Hot Stocks

Momentum day trading can be extremely profitable when done correctly...Day... Read More

Be a Smarter FOREX Currency Trader: Three Basic Principles

Below I will describe three basic principles that may come... Read More

Facts of Day Trading

Are you thinking of entering the fast-paced world of day... Read More

The Margin Advantages of Trading FOREX.

There is one aspect that is considered as one of... Read More

Your Mother Could Make Money In Forex Trading

The question would be not whether she could but rather... Read More

An Evaluation of the Devaluation

A Minister of Finance is morally right to lie about... Read More

Trading Profitably on the Foreign Exchange Market

You may be asking yourself "how does one begin to... Read More

The Basics of Forex

Foreign exchange market is also known as Forex or FX... Read More

Is The U.S. Dollar About To Reverse Course?

For the first time in several years the U.S. dollar... Read More

Advantages of Trading FOREX Over Stocks and Commodities

There are many advantages to Trading FOREX as your main... Read More

Forex Brokers - Helping to Maximize Your Success

A Forex broker is a broker dealing in foreign exchange,... Read More

Forex Scams: How to Spot Them A Mile Away

In recent years, investors have witnessed increased number of investment... Read More

Day Trading Training ... You need more than just going to a free stock market workshop to learn

Day trading is all about making buy and sell decisions.... Read More

Forex Trading - Advantages and Disadvantages

What is Forex Trading?Forex, or Foreign Exchange, is the simultaneous... Read More

Where to Get Forex Training

For those of you who are interested in forex trading,... Read More

Trading Tips No 1: Learn How to Trade The Moment of Truth

So you have learned how to trade the markets by... Read More

A Look at Forex Market Makers

The investor in the currency market takes for granted that... Read More

ISO 4217 in Forex Trading

ISO 4217 is an international standard describing three letter codes... Read More

Money Management, Part 1

There are some common mistakes I've seen traders make in... Read More

Day Trading - Moving Averages vs Support and Resistance

When day trading the SP and Nasdaq futures, do you... Read More

Trading Timeframes

Long TermLong term traders will work from end of day... Read More

What is Forex Trading?

Forex, or Foreign Exchange, is the simultaneous exchange of one... Read More

Commodity Trading - Advantages and Disadvantages

What Is Commodity Trading?Commodity futures markets allow commercial producers and... Read More