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Types of Foreign Exchange Transaction

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Any act of buying or selling foreign currency, or borrowing, giving credit or accepting or providing foreign currency in any way is referred to as a Foreign Exchange Transaction. The word as well includes the act of granting approval besides foreign exchange by the Bank.

Here are the types of Transactions:

Spot Transaction: The spot transaction is when the buyer and seller pay their payments in different currencies within two days of the deal. It is the quickest way of currency exchange. Currencies shall be exchanged here over a period of two days, which means that between countries no contract is concluded. The currency exchange rate is known as the spot currency exchange rate. This rate is often the current currency. A place market is referred to as the place market for the sale and purchase of currencies.

Forward Transactions: A forward transaction is a future transaction in which the buyer and seller sign an agreement to sell and buy the currency at a fixed currency in the future after 90 days of the deal. The exchange rate is known as the forward exchange rate. A forward market is a market in which deals are made to sell and purchase the money sometime in the future.

Future Transaction: Future transactions are also transactions forwards and are processed in the same way as ordinary transactions for the forward ones. However, for the following reasons, the transactions made in a futures contract differ from those made in the forward contract:

The futures contracts can be customised on the request of the customer, while future contracts, like characteristics, dates and contract size, are standardised.

Only on the organised exchanges can future contracts be traded, while any future contracts can be traded depending on the convenience of the customer.

In the case of futures contracts, no margin will be needed whereas the margins of all participants are needed and the initial margin shall be maintained as a guarantee in order to determine the future situation.

Swap Transactions: Swap transactions involve simultaneous borrowing and lending between two investors of two different currencies. In this case, one investor borrows the currency and gives the second investor another currency. The duty to repay the money shall be used as a security and the amount shall be repaid at an advance rate. The swap contracts allow investors to use the funds of their own currency for the repayment, without the risk of foreign exchange, of the obligations denominated in a different currency.

Option Transactions: The option of foreign trade gives a recipient the right, but not the obligation, to exchange the currency at an agreed exchange rate at a predefined date, in one denomination to another. A call option is called for purchasing currency, whereas a set option for selling the currency.

The transaction involves the conversion of one country’s currency into another country’s currency for payments settlement.

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  1. Pingback: What are the Functions of the Foreign Exchange Market? | News Journal 5

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