Financial instruments

The basic elements of each contract is the pair of currencies (the currency to sell / buy), the exchange rate and the amount of the transaction. The first currency is the base currency and the second currency is the quote, in technical terms to buy the base currency and then sell the second, is said ‘long’, and conversely the purchase of shares currency against the sale of the base currency is said ‘short’.

The most common derivatives to operate on Forex are:

Forward Transaction: literally is a swap contract in which counterparties agree establishing the parameters of the transaction for a future date in which the investment takes place, regardless of the market situation. In this way it is possible to cope with risks due to fluctuations in exchange rates since the buyer and seller agree to exchange at a fixed date of an underlying asset at a specified price established at the time of conclusion of the contract. So we will have a ‘long forward position’ when it is the buyer who agrees to buy (in the given date) the underlying at the agreed price, or ‘short forward position’ where is the seller who agrees to sell the underlying at set price. Regardless of the type, the forward contract commits both parties to the execution of the exchange (against underlying forward price) and who should fail to do so, would be in default.

Futures: financial tool very similar to forward contracts even here the counterparties agree to exchange at a certain time and at a specified price under the conditions established at the time of conclusion of the contract, with the difference that the treatment is in organized and centralized markets characterized by standardization of the amounts and expirations. Their purpose (as happens in forward) is to fix in time and in the amount the margin of risk involved in a transaction of a financial nature.

Swap: contract in which counterparties agree to exchange currency for a certain period of time, pledging to reverse the transaction at a future date. The most widely used types of swaps are the currency swaps which involve the exchange of funds and interest and the interest rate swap in which the parties exchange payments of interest calculated on a sum of money of reference for period of time at the moment of the conclusion of the contract. The function of this type of derivates is to create new financial opportunities not otherwise be achieved through the exchange of cash flows related to an underlying asset with other cash flows of different types.

Spot: a real ‘spot trading’ in which the parties execute the same exchange. In other words it gives an asset and the other pays the price (called spot price) or other goods or services.

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