Different types of FX trades
In this post we’ll be giving you an overview of the different types of FX trades you can make and the benefits they add to your business.
1. Spot Trade
A spot trade is the transaction most of you will be familiar with. For example, someone looking to exchange Pounds to a foreign currency may contact a number of brokers, discuss the exchange rate for that day and agree to use the broker offering the best rate. Spot trades are the most common kind of FX transaction and settled instantaneously. As a result, the main benefit of this type of trade is the individual or business making the trade gets their foreign currency immediately.
2. Limit Order
A limit order is most commonly used to trade a currency pair when certain conditions set in the order are met. The order isn’t executed until those conditions are met. For example, if you are changing Pounds to Euros and you believe the exchange rate will go up you can enter into a limit order and set the rate at which the order should be executed. If today’s rate is 1.26 and you believe it will rise over the course of the week, you can set a limit order at 1.29. If the rate reaches 1.29 Euros for each Pound the broker will automatically execute the trade on your behalf. A benefit of using limit orders is the individual or business making the trade doesn’t have to constantly watch the markets to look for the best rate to make a spot trade. A limit order can be made in advance and then forgotten about.
3. Forward Contract
A forward contract is a way of fixing your exchange rate in advance, so you know exactly how much currency you’ll get for the duration of the contract. Forward contracts can be ideal for those buying or selling property abroad. For example, if you agree to buy a house abroad but the completion date of the sale is a few weeks away you can use a forward contract to guarantee the exchange rate you’ll get and consequently manage and reduce the costs of your purchase.
This week’s post has been an overview of the main types of FX trade. Next week I’ll look at spot trades in more detail.