Forward
In simple terms, a Forward is a Contract between two parties to exchange currencies at
- an agreed point in the future and,
- at a rate agreed on today. You’ll recall this differs from our FX Spot which is an agreement to exchange currencies today, subject to the settlement period.
A Forward is referred to as a Non-Standardised contract and is traded Over the Counter (OTC), not on an Exchange. This allows the two parties to negotiate their own terms for the contract.
Future
A Future contract is very similar to a Forward, in that it is a contract between two parties to exchange currencies of an agreed quantity and price, at some agreed point in the future.
The main difference between a Forward and Future is that the Future Contract is negotiated via an Exchange, not as an OTC trade. As such, the Future is a Standardised contract, being subject to the rules of the Exchange and regulations of the Market.
Option
An Option gives the owner the option, but not the obligation, to exercise an FX exchange on an agreed amount of currency for an agreed rate, at an agreed time in the future. This is different than our Forward or Future, where the contract requires the exchange to take place at the specified future date.
There are a number of Option Styles but the two most common are:
- American: the Option can be exercised on any trading day, on or before expiration
- European: the Option can only be exercised on the expiration date
With an Option it’s possible to buy up to the contract amount in a series of smaller transactions called Drawdowns.
A variation on the basic Option is the Time Option, where the option is focused on when to exercise the trade and is not an option to choose to trade or not.
Swap
A Swap is an FX transaction that involves the simultaneous purchase of one currency and sale of another with two different value dates. It can be viewed as having 2 FX Outright trades in one execution (typically a Spot and Forward trade). Each of this two part buy and sell activity is referred to as a Leg and a Swap has two legs:
- A Near Leg which is typically Spot
- A Far Leg which will be the reverse trade of the Near Leg
In an Even Swap the amount of currency bought and sold in each leg matches and so the buy and sell values cancel each other out. An Uneven Swap is a Swap but the amount in the Near Leg and Far Leg are different.
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