Currency market objects are currency transactions and foreign exchange values.
Currency transactions are a type of activity of the state, enterprises, organizations, banking and other financial and credit institutions for the sale, settlement and provision of foreign currency in a loan.
Currency transactions are carried out in foreign exchange markets.
In accordance with the division of foreign exchange markets into spot (cash, cash, current) and urgent, the corresponding types of foreign exchange transactions are distinguished. Moreover, if cash (cash, current, spot) operations are carried out on the spot market, those. currency purchase and sale operations, settlements on which are carried out no later than 2 banking days, then a variety of foreign exchange transactions are carried out on the urgent foreign exchange market with a deadline of more than two banking days (i.e. in the future). Such operations include operations such as currency forward, currency (financial) futures, currency (net) option, swap transactions, etc. All of them have a similar mechanism for establishing the exchange rate and the final execution of the currency contract.
The course used in spot transactions is called a spot course. The spot course reflects how highly the national currency is outside this country at the time of operations.
Economic agents can use the services of an urgent (forward) foreign exchange market. If a foreign exchange market participant needs to buy a foreign currency after a certain period of time, he can conclude a so-called fixed-term contract for the purchase of this currency. Fixed-term foreign exchange transactions include forward contracts, futures contracts and currency options.
Both forward and futures contracts are an agreement between the two parties on the exchange of a fixed amount of currency at a certain date in the future at a predetermined (urgent) rate. Both contracts are binding. Currency futures were first used in 1972 in the Chicago Foreign Exchange Market. The difference between currency futures and forward operations is that:
futures are trading in standard contracts; a guarantee deposit is a prerequisite for futures; settlements between counterparties on foreign exchange futures are carried out through the clearing house at the exchange of exchange, which simultaneously enters by an intermediary between the parties and the guarantor of the transaction.
The advantage of futures in front of the forward is its high liquidity and constant quotation on the foreign exchange. With the help of futures, exporters have the ability to hedge their operations.
A currency option is a contract that provides the right (but not an obligation) to one of the participants in the transaction to buy or sell a certain amount of foreign currency at a fixed price for a certain period of time. The option buyer pays a bonus to his seller in return for his obligation to exercise the above right. Currency options are applied when the option buyer seeks to insure himself against losses associated with a change in the exchange rate in a certain direction. The risk of losses from changes in the exchange rate can be of several types. A feature of the option as an insurance transaction is the risk of the seller of the option, which arises as a result of the transfer of the currency risk of the exporter or investor to it. Wrongly calculating the option course, the seller risks incurring losses that exceed the premium received by him. Therefore, the option seller always seeks to underestimate his course and increase the premium, which may be unacceptable to the buyer.
Currency arbitration operations are carried out on an urgent forex market. Currency arbitration is a transaction between banks for the purchase and sale of one foreign currency for another at an agreed rate with the expectation of an agreed date in order to make a profit when changing exchange rates on the international market. Currency arbitration involves the implementation of at least two opposing transactions for the purchase and sale of currencies for the same amount. Banks can carry out currency arbitration operations on behalf of customers, i.e. enterprises in the person of an authorized person (diler), with the date of currency “spot” with the obligatory closing of the position, open on behalf of the client on the date of the currency. At the same time, the company cannot buy or sell foreign currency, it gives the bank an order to purchase or sell currency on behalf of the bank. The mandatory terms of the transaction include the opening of an insurance deposit by the enterprise, the funds from which are used by the bank as compensation for possible losses of the bank during the last arbitration operations. Banks carry out operations in the amount of the position exceeding a certain number of times (20, 25, 30, 40, 50 100) the size of the insurance deposit. The client enters into an agreement with an authorized bank, according to which the bank undertakes, on behalf of the client, to carry out arbitration operations at its own expense and on its own behalf. At the same time, the bank has a risk of losses from such transactions. Therefore, the client as a deposit puts a certain amount on a deposit in this bank. The size of such a deposit is determined on the basis of the amount of transactions concluded by the bank and the credit shoulder provided to the client. If the bank receives a loss from the transaction, then the enterprise has obligations to the bank in the amount of this loss, which are covered from the collateral deposit.
If the bank made a profit from the transaction, then it has obligations to the enterprise in the amount of this profit. The amount received can be credited to the client’s security deposit as interest or transferred to any account that the client indicates, depending on the terms of the contract. A prerequisite is to instruct the client to the bank to close the open position, since the bank plays with its money. If this does not happen, then the bank may itself close a long position in a short, but at any rate.
In the world market, situations are extremely rare when exchange rates against each other change by more than 2%, and it is almost impossible to lose your deposit to a client with a reasonable game. If a bank employee (dealer) sees that possible losses in the event of an unfavorable course movement may exceed the amount of the collateral deposit, he can independently, without specifying the client, close the position at a loss, not exceeding the security deposit amount.
The fixed-term exchange rate is composed of the spot rate at the time of conclusion of the transaction and the premium or discount, that is, allowances or discounts, depending on interest rates at the moment. Currency with a higher interest rate will be sold on the forward market at a discount in relation to a currency with a lower interest rate. Conversely, a currency with a lower interest rate will be sold on the forward market with a premium against a currency with a higher interest rate.
The urgent foreign exchange market allows you to both insure currency risks and speculate in currency.