Top Transaction Types in Forex Trading

By: Justin Stewart

For those who have never heard of foreign exchange, also known as forex, they may be incredibly confused when you explain to them that investors buy, sell, and trade currencies. They may be even more confused to hear that the exchange rates for these currencies rely on the forex market and the way that investors view the currencies around the world. Those who begin to get into forex trading and investing may find that it can be even more confusing to determine what kind of investment to go with. There are multiple ways to have a transaction in the forex world. Some people may not understand the pros and cons between each, and why they may want to go with a certain forex transaction type over another. By trying to understand the top 5 transactions made on the forex market, you may better understand what you may want to do with your own investment.

Forward Transaction

A forward transaction is a transaction that is made for the future; this means that the money does not actually come into play until a future date. The buyer and seller agree on a specific, stuck exchange rate for that certain date in the future. Because of the fixed date, the rate is stuck to the choice on that day. The actual market numbers on the day of the transaction do not matter, as the fixed rate cannot be changed. There is no limit on the extent of a future forward transaction, as it is dependent on the buyer and seller alone.

Spot Transaction

The spot transaction is the quickest and fastest way to actually exchange your currency. There is an exchange of two currencies over a two day period on the forex exchange, meaning that no contracts are signed. This allows the transaction to happen at a faster pace.

Future Transactions

These transactions are also forward transactions, and deal with contracts much like the normal forward transactions. The contracts usually deal with a certain amount by a certain date, rather than on a certain date. The contract lasts for the time specified, and are major on the forex market.

Swap Transactions

Swap transactions are easily the most normal and common of the multiple ways to do transactions on the forex market. Swap transactions are also forward transactions, but they do not happen as a trade through the forex market itself. A swap transaction can be confusing at first, two investors agree to change currencies for a certain amount of time. A later date is set for the two investors to change currencies back.

Option Transactions

Option transactions in the forex market common. The foreign exchange options give an investor the right (or option) to exchange money on the forex market. This option has a fixed exchange rate and a specific date. The option transaction is the most prominent in the forex market because of the high traffic and amount of money that is sunk into the currency forex market daily.

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