Types of currency transactions

Currency transaction is a transaction involving the transfer of ownership right on currency values.

Types of currency transactions are distinguished depending on the exchange rate and terms of delivery. They are cash and term currency transactions. Cash currency transactions are mainly carried out on spot terms, which means the payment at the time of the transaction, or no later than the second business day after the transaction at the rate fixed at the time of its conclusion. Such agreements are concluded verbally or using automatic connection, and their purpose is to provide foreign currency transactions and receiving rate profit by banks.

During the term (forward) currency transactions the parties agree to supply the agreed amount of foreign currency after a certain period of time after the transaction at the rate fixed at the time of its conclusion. The most common is the period from one week to 6 months. Rates of forward contracts can be either higher or lower than the spot rates.

Exchange rates determined now for all exchange rates that will occur later are called term (forward) rates. They should not be confused with the future spot rates. Spot exchange rate is the rate that is established in the market on a cerain date. Forward rate may be higher, lower or equal to the spot rate on that date. If it is higher, the difference is positive, it’s premium “agio”, and if it is lower, the difference is negative – “discount”.

In exchange quotes forward rate is usually not indicated, as only the size of the premium or discount, that are added or subtracted from the spot rate, are indicated. Forward transactions are concluded to hedge (to insure) investments abroad against possible losses for the conversion of currency in commercial purposes, for gaining profit due to exchange rate differences.

Other varieties of term transactions are futures and option transactions. Futures transaction is a purchase-sale of currency at fixed at the time of the transaction prices with of performing this operation after a certain period. Their main feature is a trade of standard contracts, which regulate in detail all the conditions – quantity, date, method of calculation and so on. At the time of transaction a small amount is paid – a security deposit.

The object of option agreements is the right to buy ("call" option) or sell ("put" option) the currency in the future at the rate fixed at the time of the transaction. This is an agreement with uncommitted delivery date. For the purchasing of the right to buy or sell currency a small premium is paid. If the period of the option agreement was not beneficial, then the premium paid is lost and foreign exchange transaction is not carried out. The option is profitable if the fluctuations are higher than premium.

Exchange agreement, which combines cash and term transactions, is swap transaction. This currency transaction involves the sale of two currencies on conditions of immediate delivery with simultaneous counter transaction for a specified period with the same currencies. During swap operations cash transaction is carried out on the spot exchange rate, which in term counter agreement is adjusted to premiums or discounts depending on the movement of the exchange rate. The client saves on the difference between the rates of the buyer and the seller for cash transaction.

Дата добавления: 2014-01-04