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Main Types of Trades between the Banks

Spot transactions are single outright transactions that involve the exchange of two currencies at a rate agreed to on the date of the contract for value or delivery within typically two business days Example: Bank A agrees to sell USD 150 to bank B against GBP 100.

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Outright forwards involve the exchange of two currencies at a rate agreed to on the date of the contract for value or delivery at some time in the future; This category can also include forward foreign exchange agreement transactions (FXA), non-deliverable forwards, and other forward contracts for differences Example: Bank A agrees to sell USD 150 to bank B against GBP 100 in three months.

Foreign exchange swaps involve the exchange of two currencies on a specific date at a rate agreed to at the time of the conclusion of the contract, and a reverse exchange of the same two currencies at a date further in the future at a rate agreed to at the time of the contract; Example : Bank A agrees to sell USD 150 to bank B against GBP 100 today. Bank A also agrees to buy USD 150 from bank B against GBP 95 in three months.

Currency swaps are over-the-counter contracts that involve the exchange of fixed or floating interest payments in two different currencies over the lifetime of the contract. Example: Bank A agrees to sell USD 150 to bank B against GBP 100 today. In addition, bank A will make interest rate payments of 3% in USD to bank B, while bank B will make interest payments of 2.5% in GBP to bank A for a period of 3 months.

Currency or foreign exchange options are over-the-counter contracts that give the right or the obligation—depending upon if the reporter is the purchaser or the writer—to buy or sell a currency with another currency at a specified exchange rate during a specified time period. Example : Bank A sells to bank B the option to exchange USD 150 against GBP 100; This option can be exercised at any time within a 3 months period.

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