Forex (FX) Terminologies: Forward Deal and Options Deal

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February 14, 2011 11:50 AM EST

What is a Forward deal?

A ‘Forward deal’ is an exchange transaction between currency pairs with settlement to occur at a specified future date. Such a transaction will state the specific amount of the asset to be delivered at the specific time as well as the unit price at which it will be delivered.

The Forward deal’s rate is to be decided during the contract and it is called the ‘Forward rate’. The size of the Forward deal and its duration are adjusted to the client’s needs and can be executed anytime, with no time limits.

Forward deals are not tradable and cannot be canceled. The obligation between the two sides is absolute. All money transfer occurs at the specified value date.

What is Options deal?

Option deals, give the right, but not the obligation, to buy or sell for a constant sum, during (or end) of the settlement time period, at a predetermined constant exchange rate.

Unlike Spot or Forward deals, both high and low volatility may generate a profit in the Options market.

Currency options constitute the fastest-growing segment of FX market and represent 5% of FX market. The biggest options trading center is the US market, followed by the Great Britain and Japan. Options prices derived from cash.

 To know more about Foreign Exchange market and how it works, avail of the free e-book Foreign Exchange Guide Book from ForexCT by signing up here.

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