Spot, forwards and swaps

Posted by Scriptaty | 8:38 PM

When people refer to the “currency market” it’s sometimes unclear precisely what they mean.

Currencies are traded as futures contracts, as well as a variety of transactions in the forex market namely, spot, forward and swaps transactions.

Each type of forex transaction has its role in global banking and currency trading.

Recently the Bank for International Settlements (BIS) released its triennial survey of the foreign exchange markets (see “Forex survey finds tremendous increase in currency trading,” p. 10), and not surprisingly, it showed the spot currency market, forward transactions and swaps grew to extraordinary levels in the three years from 2001 to 2004.

According to the survey, the spot market expanded 60.5 percent to $621 billion, after contracting 32 percent in 2001; forwards grew 59 percent to $208 billion. Foreign exchange swaps turnover grew 44 percent.

With the FX market rapidly intensifying and new players getting involved every day, it is helpful for potential and current traders to understand what these different kinds of transactions are and how they interact.