SPOT MARKET
The spot or cash market is the actual price of a currency at that moment in time, it is the price for immediate delivery. The normal delivery time for a forex is two days. Transactions are normally concluded via telephone or automated dealing desks.
FORWARDS
Forward trading is different from spot trading in that you must take into account the interest differential. As each country has its own interest rate, the difference in the interest must be taken into consideration. If the interest rate in one country is 5% and the interest rate in another country is 3% then the interest differential is 2%.
Because no one really knows what the exchange rate for two currencies will be in the future, a forward attempts to calculate what a fair value for the two currencies will be. Forward rates are normally higher or lower (at a premium or at a discount) to the spot rate.
SWAPS
A swap is simply a combination of a spot deal whilst at the same time making a forward deal or vice versa. Let’ say the XYZ company wants to deal in Europe but the bean counters believe they can get a better deal in US. So the XYZ company will borrow $5million at 4% over the next 5 years in the US and at the same time, the XYZ company makes a deal to trade its future dollar liability for Euros.
CURRECY FUTURES
Currency futures are a particular type of forward transaction. They have specific contract sizes, maturity dates and are traded on a formal exchange, like Chicago Mercantile Exchange.
The advantage of the currency futures contract is that smaller players can get involved, as there is a smaller initial capital outlay relative to the contract size
CURRENCY OPTIONS
Currency option provide the buyer with the right but not the obligation, to sell or buy an amount of forex at an exchange rate and date specified in advance. The buyer must pay a premium to the writer of the option, which in most cases will be the broker or bank