Due to the advancement of technology and online currency trading platforms and a reduced barrier to entry, Forex or currency trading has witnessed a surge in individual investors' participation. Currency trading entails the sale and purchase of foreign currencies with the objective of making profits from the volatility of currency rates. One of the most critical benefits that currency trading offers is liquidity which allows investors to easily enter and exit a position within a fraction of a second in any major currency pair. However, the risks associated with forex trading that can get further elevated in the absence of a right trading strategy cannot be neglected. Understanding the fundamentals that drive currency fluctuations and technical analysis of the currency pairs can increase the possible returns from forex trading, making it more profitable.
Financial contracts or financial instruments whose value is linked to an underlying asset's value is called derivatives that can be used for multiple purposes, including hedging. In the case of currency or Forex trading, currency pairs are the underlying assets. Forex risk management, speculation, and leveraging a position are the varied purposes for which derivatives are found useful. Currency derivatives are forwards, futures, swaps and options contracts using which one can buy or sell specific quantities of a particular currency pair on a predetermined future date.
Currency Forward Contracts
Forward contracts are traded over-the-counter with an authorized counter-party wherein its terms, including the exchange rate, size, currency pair, settlement process and due date, are set as per the agreement between the two parties involved. The forward contracts involve the exchange of currencies at a predetermined rate at a specified date in the future that extends the benefit of enhanced protection against unfavourable forex rate volatility. Due to the non-standardized nature of the forward contracts, they expose the market participants to counterparty risk upon entering a forward contract.
Currency Future Contracts
An agreement between two parties to exchange currencies at a specified date in the future utilizing a predetermined exchange rate is known as future contracts. Since they are traded on an exchange, they are standardized and do not expose the market participants entering a future contract to counterparty risk. The parties that are involved in the future contracts are under an obligation to fulfil the commitment of buying and selling the specified currency pair. An initial margin is kept as collateral in case of future contracts to establish the future position where margins are required of all the participants.
Currency Option Contracts
The option contracts have some similarities to futures contracts since both entail an agreement to exchange currency at a specified date in the future at a predetermined exchange rate. However, the options contracts differ on account of flexibility as they don't impose an obligation for the fulfilment of the contract on the parties involved. One can either fulfil the contract or withdraw from it depending upon whether the forex market movements are favourable to them.
Swaps are over-the-counter contracts that do not trade on exchanges and are generally utilized between financial institutions or businesses rather than by retail investors. They are customized to the needs of the parties involved in the swap contract. Swap transactions refer to the purchase in the spot market and sale in the forward market or sale in the spot market and purchase in the forward market, which involves simultaneous borrowing and lending of two different currencies between two different investors. The funds available in the currency withheld by the participants can be utilized to pay off their obligations that are denominated in a different currency. For example, swap contracts can be beneficial for a company paying a variable rate of interest. The company may swap its interest payment with another company which will pay the first company a fixed rate.
Derivatives and, in general, the forex market can be difficult to interpret, especially for smaller organizations with no time to spare to sharpen their forex understanding. Taking the assistance of professionals like Myfrexeye can enable one to get the maximum benefits from using derivatives correctly. Myforexeye provides services like Dr. Forex ( Forex Risk Advisory) and Forex Risk Management, through which we offer our clients' technical and fundamental analysis based forex reports, strategic recommendations for hedging foreign exchange risks, including the right way to use derivatives. While extending expert assistance, special emphasis is laid on building the client's understanding too through explanatory sessions via phone and video call. Besides enabling robust forex risk management against forex risks for your business while considering company objectives, we also offer services like transaction process outsourcing, live forex updates, smooth and quick trade finance, overseas money transfer and regular market updates to simplify forex for individuals, traders and firms while enhancing the savings on their forex transactions.
Myforexeye is committed to providing a resolution to your Forex and trade finance needs and filling the gap of the unmet demands in terms of credit and financial guidance to MSMEs and larger corporates. Through our team of experienced professionals and consultants well versed in the field of forex and trade finance, we provide streamlined forex solutions for one’s convenience and at their disposal. Corroborating our efforts of providing solutions that are effective to companies for realizing their maximum potential are the latest technology and assistance from the veterans of the forex and trade finance industry. It is our objective to aid our clients in making savings and eliminating the aspect of hidden commission fees payable to the bank. Our user-friendly digital platforms - web portal and mobile app, enables one to access the best quotes for all types of forex conversions as well as avail import and export finance and calculate interest costs to make informed decisions.
Speak to one of our specialists to acquire a detailed understanding of forex solutions offered by Myforexeye.
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10 Mar 2021 05:00 PM
It operates for five days a week and 24 hours a day wherein currency is traded electronically, the value of which is dictated by the fluctuating foreign currency exchange rates. The forex market's importance is not just confined to larger corporation
04 Mar 2021 03:08 PM
Contrary to popular beliefs, the forex market's importance is not just constricted to commercial banks and large corporations. The smallest of the operations involving an individual
21 Jul 2020 06:13 PM
A country’s exchange rate and its imports and exports hold a complicated relationship as there is a constant feedback circuit between the way a country’s currency is valued and the international trade.
29 Jun 2020 05:35 PM
Dynamic hedging is a foreign exchange risk management strategy that allows businesses and individuals to readapt their hedging positions to evolving market conditions by providing flexible solutions to protect investments from exchange rate risks.
19 Jun 2020 05:01 PM
Management of Currency Exchange Risk is of paramount importance during turbulent times, like this pandemic. The currency fluctuations are very volatile and cannot be predicted as the circumstances are uncertain.
06 Jun 2020 03:59 PM
Outrights, in FX markets refer to the type of transactions where two parties agree to buy or sell a given amount of currency at a predetermined rate, on a specified date in future.