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Risks involved in Forex

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Forward contracts


Forward contract is a mechanism through which the rate is fixed in advance for purchase or sale of foreign currency at a future date. In such an arrangement, the risk of loss, which might accrue on account of adverse movement in the rate of exchange, is sought to be removed


Options


One essential feature of a forward contract is that once one has locked into a rate in a forward contract, he cannot benefit from the movement of the market in his favour. Options are unique financial instruments in that they enable the option holder (or buyer of option) to maximize his profits at the same time limiting his losses. This is possible as options confer upon the holder the right (to buy or sell) without the obligation (to buy or sell)


Swaps


A swap means an exchange of specific streams of payments over an agreed period of time between two parties, referred to as counter parties. The essence of a swap contract is the binding of two counter parties to exchange two different payment streams over time, the payment being tied at least in part to subsequent and uncertain market price developments. In most cases the prices concerned have been exchange rates and / or interest rates


Futures


Futures are specialized contracts to buy or sell a standard quantity of an item at a specified future date and at a fixed price that is agreed when the contract is made. Futures are traded on futures exchange.


The above definition applies to any futures contract – commodity futures or financial futures. The main difference is that for many financial futures contracts instead of physical delivery there is only a cash settlement on the delivery date.


I hope this information is useful for you to make money in the currency markets!!!:tinysmile_cry_t:
 
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