So you think that you might want to start trading currency, or are interested in finding out more about financial instruments and currency trading terms which is the starting point of understanding the Financial and currency markets. Below are some of the most commonly used terms and thier meanings:
A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira and Russian Ruble, this settles the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between the two currencies, it has the shortest time frame and involves cash rather than a contract; interest is not included in the agreed-upon transaction. Spot transactions have around the second largest turnover by volume after Swap transactions among all FX transactions in the Global FX market.
Another way to deal with the foreign exchange risk is to engage in a forward the transaction. In this transaction, the money does not actually change hands until future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a one day, a few days, months or years. Usually the date is decided by both parties.
Foreign currency futures are exchange traded forward transactions that have a standard contract size and maturity dates — for example, $2000 for next December at an agreed rate. Future’s are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
Foreign exchange swap
The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.
Foreign exchange option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.
Exchange-traded funds (or ETFs) are open ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g., SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators.
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don’t wish to bear it, to those who do.