Trading is the buying and selling of various financial instruments namely currencies, futures, options and stocks, with the goal of making a profit from the difference between the buying and selling price. There are different styles of trading which depends on the personality of the trader. An array of Forex (FX)/ Precious Metals (PM) products that are available in the forex market can be summarized as follows:-

 Products Foreign Exchange Precious Metals Spot Forwards Currency Swap Non-Deliverable Forwards (NDF) x Non-Deliverable Swaps (NDS) x Exchange for Physical Options - Vanilla Options - Exotics

Spot

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 2-business days. To enter into a spot contract, one has to define the amount to be transacted, the two currencies involved as well as to which specific currency to buy or sell.

Forwards

The spot market is traded on a 2-business day value date. For more than 2-business day value date, it will be termed as outright forward contract. Outright forward rate is calculated based upon the interest rate differential between the two currencies involved and the spot rate.

Currency Swap

FX swap market is where one currency is swapped for another for a period of time, and then swapped back, creating an exchange and re-exchange. An FX swap has two separate legs settling on two different value dates, even though it is arranged as a single trade. The two counterparties agree to exchange two currencies at a particular rate on one date (the "near date") and to reverse payments, usually at a different rate, on a specified subsequent date (the "far date").

Non-Deliverable Forwards (NDF)

Those currencies which cannot be settled due to their countries specific convertible regulations are traded offshore on non-deliverable basis. NDF is a cash-settled forward contract on a non-convertible foreign currency for an agreed notional amount. The profit or loss of the NDF is calculated at the time of the settlement date by taking the difference between the agreed upon exchange rate and the fixing rate at the time of settlement. All NDFs have a fixing date and a settlement date. The fixing date is the date at which the difference between the fixing rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the difference is due to the party receiving payment. NDFs are commonly quoted for time periods of one month up to one year, and are normally quoted and settled in U.S. dollars.

Non-Deliverable Swaps (NDS)

Non-Deliverable Swap is a swap done on non-deliverable currencies.

Exchange for Physical (EFP)

Exchange for Physical (EFP) is the exchange of a long or short position in a futures contract for an equivalent position in the cash market. EFP gives the flexibility of transferring positions from the cash market to futures market, or vice versa. This product is widely used by hedge funds for reasons such as to mitigate counterparty risks, access liquidity and consolidation of positions to one market.

Options - Vanilla

Diagrammatical illustrations for Call

Diagrammatical illustrations for Put

A combination of call and put options can be adopted to create different options trading strategy that best suits a trader. Common option strategies are detailed in table below.

 Vertical bear spread Buy a call (put) option and sell a call (put) option with a lower strike price. All options have the same maturity. Vertical bull spread Buy a call (put) option and sell a call (put) option with a higher strike price. All options have the same maturity. Straddle Buy(Sell) a call and a put option. Both with the same strike price and maturity. Strangle A short put and a short call or a long put and a long call with the same expiration date and different strike prices. Butterfly A combination of a vertical bull and vertical bear spread with the same maturity on all options and the same strike price on all short options. Time (Calendar) spread Sell one call (put) and buy another call (put) with a longer time to expiration. The options have the same strike price.

Diagrammatical illustrations for Strangle

Diagrammatical illustrations for Butterfly

Options - Exotics

An option contract which has features making it more complex than commonly traded products like plain vanilla put or call option. Also known as a non-standard option that generally trade over-the-counter (OTC).

One popular type of exotic option among others is Barrier Options which is explained below.

Barrier Options

Path-dependent option with both its payoff pattern and its survival to the nominal expiration date is dependent not only on the final price of the underlying but also on whether or not the underlying sells at or through a barrier (instrike, outstrike) price during the life of the option. Barrier options are always cheaper than a similar option without barrier. Barrier options were created to provide the insurance value of an option without charging as much premium.

"In" options start their lives worthless and only become active in the event a predetermined knock-in barrier price is breached. "Out" options start their lives active and become null and void in the event a certain knock-out barrier price is breached.

The four main types of barrier options are:

• Up-and-out
• Spot price starts below the barrier level and has to move up for the option to be knocked out.

• Down-and-out
• Spot price starts above the barrier level and has to move down for the option to become null and void.

• Up-and-in
• Spot price starts below the barrier level and has to move up for the option to become activated.

• Down-and-in
• Spot price starts above the barrier level and has to move down for the option to become activated.

Common barrier option strategies are detailed in table below.

For example, a European call option may be written on an underlying with spot price of $100, and a knockout barrier of$130. This option behaves in every way like a vanilla European call, except if the spot price ever moves above $130, the option "knocks out" and the contract is null and void. Note that the option does not reactivate if the spot price falls below$130 again. Once it is out, it is out for good.

Will China press for an alternate currency to replace US Dollars as the global currency?

Yes
No

Polls Archive

» FLS Chart
» FLS News
» Economic Calendar