20-04-2012, 02:34 PM
FOREX (foreign Exchange)
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1) Spot foreign exchange
A spot contract is a binding obligation to buy or sell a certain amount of foreign currency at the current market rate, for settlement in two business days' time. To enter into a spot deal you advise us of the amount, the two currencies involved and which currency you would like to buy or sell.
Purpose
Companies involved in international trade may be required to make payments, or to receive payments, in a foreign currency. A spot contract allows a company to buy or sell foreign currency on the day it chooses to deal.
2) Forward exchange contracts
A forward exchange contract (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on a certain future date. To take out a forward contract you need to advise us of the amount, the two currencies involved, the expiry date and whether you would like to buy or sell the currency. It can be possible to build in some flexibility to allow the purchase or sale of the currency between two pre-defined dates rather than a single maturity date.
Purpose
A forward contract is the simplest method of covering exchange risk because it locks in an exchange rate. This strategy overcomes one of the problems that you can experience when importing or exporting in foreign currency, as you can now budget at a guaranteed rate of exchange.
2(a) Non-Deliverable Forwards
A cash-settled forward contract on a nonconvertible or thinly traded foreign currency. The contract is settled in the investor's currency based on an agreed-upon posted exchange rate. They provide possibilities to hedge emerging market currency exposures for purposes of trade and investment
Use of the Non-Deliverable Forward (NDF) market allows offshore parties to hedge exchange rate exposures from many emerging market currencies in Asia, Latin America and Africa. Hedging is accomplished without any physical transfers of the hedged currencies, and without the need to deal in local currency markets. Therefore, the party seeking protection can avoid both local counterparty risk and the cost of holding accounts in local currencies.
Conceptually, a NDF is similar to an outright forward foreign exchange transaction. In both cases, a (notional) principal amount, forward exchange rate and forward date are locked in at the front end of the deal. The difference is that, in a NDF transaction, there will be no physical transfer of the principal amount.
A NDF contract is agreed on the basis of a net settlement in dollars, euros, or other fully convertible currency. The settlement will reflect any differential between the agreed forward rate and the actual exchange rate on the agreed forward date. Therefore, mechanically, a NDF is practically a cash-settled outright forward.
2 types of Confirmations
-- Long Form is standard confirmation ( received via FAX)
-- Short Form (received via
3) FX Swap
In finance, a forex swap (or FX swap) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward).; see Foreign exchange derivative.
A forex swap consists of two legs:
a spot foreign exchange transaction, and
a forward foreign exchange transaction.
These two legs are executed simultaneously for the same quantity, and therefore offset each other.
It is also common to trade forward-forward, where both transactions are for (different) forward dates.