A forex market is a place where the major eight currencies across the world through the distinct financial instrument in the forex market is traded. Financial instruments have a different kind of rates. Forex is the liquid market known so far. It operates all day except on weekends. An investor should be aware this kind of financial instruments before investing in foreign exchange market.
The first financial instrument is the spot. This is a transaction that involves a two-day process. It is the quickest transaction in the forex market. It mainly involves a direct exchange between two currencies of any kind. It basically lasts within a short period. It typically involves dealing with cash because life span is very short. The transaction depends on spot rate. Spot rates are rates that exist in the market when the transaction took place.
Forward is another common mechanism that is used in foreign exchange market. The exchange takes place between two parties. They should agree upon the exchange rates and later takes place on an agreed future date. The rates that exist in the market does not play any role in determining the price or rate of exchange. The future date can be one day, one month or even after one year. The two parties should agree on the exact date and stick to the plan.
Future is also another financial instrument that exists in foreign exchange market. Future is contracts that are traded depending on the standard exchange. The future is a standard contact that is based in maturity dates. The average maturity date of many common futures is usually three months. There is interest which is involved within these three months. These interests are paid as legal fees to the contracts.
Swap is also a financial instrument in the forex market. This where the seller and the buyer agree to exchange the currency for a particular period. The transaction can be reversed when the maturity date is met. These type of contract is not standardised. The seller and buyer can trade without any involvement in exchanges.
Options are also a common instrument used by traders in the market. The owner of the contract has right but not the obligation to explain the currencies. Both the parties should agree on the exchange rate on a particular future date. It is similar to a forward contract. The difference with forwarding contract is that in forward both the seller and buyer have an obligation, but in options, it gives only the owner the rights that one may exercise or may not exercise.
An investor should decide on the type of financial instrument that is right for oneself. Every contract involves risks. To choose the right one investors should approach forex experts to explain to them fully. An investor can practice two or more financial instruments in the market depending on the situation of the market. Some factors affect these financial instruments. It involves government policies, political factors, financial stability, hedging activities, foreign investors and balance of payments. An investor should learn how to control these elements.