the most popular ones are retail forex, spot FX, currency futures, currency options, currency exchange-traded funds (or ETFs), forex CFDs, and forex spread betting.
Currency futures are an exchange-traded futures contract that specify the price in one currency at which another currency can be bought or sold at a future date. Currency futures contracts are legally binding and counterparties that are still holding the contracts on the expiration date must deliver the currency amount at the specified price on the specified delivery date. Currency futures can be used to hedge other trades or currency risks, or to speculate on price movements in currencies.
Currency futures may be contrasted with non-standardized currency forwards, which trade over-the-counter (OTC).
- Currency futures are futures contracts for currencies that specify the price of exchanging one currency for another at a future date.
- The rate for currency futures contracts is derived from spot rates of the currency pair.
- Currency futures are used to hedge the risk of receiving payments in a foreign currency.
A currency option (also known as a forex option) is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. For this right, a premium is paid to the seller.
A currency ETF is a pooled investment that provides investors with exposure to foreign exchange (forex) or currencies. They allow investors to gain exposure to changes in exchange rates in one or more currency pairs.
Like other exchange-traded funds (ETFs), investors can purchase currency ETFs on exchanges just like shares of corporate stocks. These investments are usually passively managed, and underlying currencies are held in a single country or basket of currencies.
- Currency ETFs are exchange-traded funds that track the relative value of a currency or a basket of currencies.
- These investment vehicles allow ordinary individuals to gain exposure to the forex market through a managed fund without the burdens of placing individual trades.
- Currency ETFs can be used to speculate on forex markets, diversify a portfolio, or hedge against currency risks.
- Risks associated with currency ETFs tend to be macroeconomic, including geopolitical risks and interest rate hikes.
Spot FX is the purchase or sale of forex ‘on the spot’, which means the exchange takes place at the exact point that the trade is settled. When trading spot forex, you buy and sell the currency pair at the current market rate, known as the spot price.
Trading in the actual spot forex market is NOT where retail traders trade though.
A retail foreign exchange dealer (RFED) acts as a counterparty to an off-exchange, over-the-counter (OTC) foreign currency transaction where buying and selling of financial instruments do not involve any of the exchanges.
- A retail foreign exchange dealer (RFED) acts as a counterparty to an off-exchange, over-the-counter (OTC) foreign currency transaction where buying and selling of financial instruments do not involve any of the exchanges.
- Retail foreign exchange dealers complete forex transactions, futures contracts, options on futures contracts, and options contracts for people who are not eligible to execute these transactions elsewhere.
- The Commodity Futures Trading Commission (CFTC) does not directly regulate these trades but still has requirements on individuals who want to handle these transactions.
- Retail foreign exchange dealers are required to become members of the National Futures Association (NFA).
- RFEDs are also required to have at least one principal who is a forex-associated person.
Forex Spread Bet
Forex spread betting allows speculation on the movements of the selected currency without actually transacting in the foreign exchange market.
- Forex spread betting allows speculation on the movements of the selected currency without actually transacting in the foreign exchange market.
- The three components to a forex spread bet are direction of the trade, size of the bet, and the spread of the instrument to be traded.
- The advantage of forex spread betting is that it allows traders the ability to utilize the concept of leverage when placing a trade.
What are forex CFDs? Forex CFDs are contracts used to trade currency pairs via leverage. The forex market is known to be highly volatile, so traders often choose to trade this asset class using CFDs – as it enables them to speculate on both rising and falling prices.
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