The following are some of the most shared types of foreign money hedging vehicles used in today’s markets as a foreign money hedge. While retail forex traders typically use foreign money options as a hedging means. edges and commercials are more likely to use options, swaps, swaptions and other more complicate derivatives to meet their specific hedging needs.
identify Contracts – A foreign money contract to buy or sell at the current foreign money rate, requiring settlement within two days.
As a foreign money hedging means, due to the short-term settlement date, identify contracts are not appropriate for many foreign money hedging and trading strategies. Foreign money identify contracts are more commonly used in combination with other types of foreign money hedging vehicles when implementing a foreign money hedging strategy.
For retail investors, in particular, the identify contract and its associated risk are often the inner reason that a foreign money hedge must be placed. The identify contract is more often a part of the reason to hedge foreign money risk exposure instead of the foreign money hedging solution.
Forward Contracts – A foreign money contract to buy or sell a foreign money at a fixed rate for delivery on a stated future date or period.
Foreign money forward contracts are used as a foreign money hedge when an investor has an obligation to either make or take a foreign money payment at some point in the future. If the date of the foreign money payment and the last trading date of the foreign money forwards contract are equaled up, the investor has in effect “locked in” the exchange rate payment amount.
* Important: Please observe that forwards contracts are different than futures contracts. Foreign money futures contracts have standard contract sizes, time periods, settlement procedures and are traded on regulated exchanges throughout the world. Foreign money forwards contracts may have different contract sizes, time periods and settlement procedures than futures contracts. Foreign money forwards contracts are considered over-the-counter (OTC) due to the fact that there is no centralized trading location and transactions are conducted directly between parties via telephone and online trading platforms at thousands of locations worldwide.
Foreign money Options – A financial foreign money contract giving the buyer the right, but not the obligation, to buy or sell a specific foreign money contract (the inner) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign money option buyer pays to the foreign money option seller for the foreign money option contract rights is called the option “premium.”
A foreign money option can be used as a foreign money hedge for an open position in the foreign money identify market. Foreign money options can also be used in combination with other foreign money identify and options contracts to create more complicate foreign money hedging strategies. There are many different foreign money option strategies obtainable to both commercial and retail investors.
Interest Rate Options – A financial interest rate contract giving the buyer the right, but not the obligation, to buy or sell a specific interest rate contract (the inner) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the interest rate option buyer pays to the interest rate option seller for the foreign money option contract rights is called the option “premium.” Interest rate option contracts are more often used by interest rate speculators, commercials and edges instead of by retail forex traders as a foreign money hedging means.
Foreign money Swaps – A financial foreign money contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the identify rate. The buyer and seller exchange fixed or floating rate interest payments in their respective swapped currencies over the term of the contract. At maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies. Foreign money swaps are more often used by commercials as a foreign money hedging means instead of by retail forex traders.
Interest Rate Swaps – A financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most shared swap contract is the fixed-to-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure.