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Types of Conversion Operations


Conception of conversion operations at Forex is deeply intertwined with the financial instruments. We classify the gold market, the credit market, the security market and Forex as the financial markets, where financial instruments are the methods of financial operations executions. Further only financial instruments which belong to Forex will be discussed. Conversion operation – is a transaction closed by Forex participants on exchange of agreed sum of currency which belongs to one country for currency of the other country for a certain date under the established quotation. Conversion operations at Forex are distinguished by the settlement date, i.e. by the date of currency supply in reference to the date of the buy/sell deal execution. According to this feature conversion operations may be divided into two types: current conversion operations (spot) and forward conversion operations.


The main volume of operations at Forex is set to the spot operations. In the international practice it is accepted that settlement date of the spot operation is the second working day after the transaction is closed. Such conditions are very convenient for counterparties because they have time to process documentation. Market, where currency exchanges on spot quotations is called the spot market.


It should be mentioned that this principle of mutual payment on operations of spot type works for the major players of the exchange market. For private investors (clients of different brokerage houses), who work at Forex by means of the Internet, the deal is executed immediately after a trader clicks the button. In such deals settlement date loses its sense – clients account always reflects current work at Forex.


Forward conversion operations include forwards, futures, options and swaps. They are also called derivatives. Such financial instruments were specially created for the real business because they help to decrease possible risks appeared as a result of quotation changes in future. For a private investor who wants to make profit at Forex such financial instruments are not so important. Nevertheless, they will be discussed for understanding the overall picture.


Forwards or forward contracts are closing between the counterparties at the condition to exchange the certain amount of currency according to the agreed quotes and day (settlement date). A deal will be closed regardless of the current (spot) quotes.


For example, forward contract may be useful when Russian company is planning to buy equipment for US Dollars abroad. Let’s imagine that this company does not have enough funds for the deal closing but expect receipt of funds to the ruble account during the month. It also forecasts the rate changes into a negative zone for the company, i.e. the rise of US Dollar. In this situation it makes sense to conclude forward contract with a bank on buying necessary amount of US Dollars with the settlement date of one month and with profitable for the company quotes. Of course, it will be difficult to find counterparty because banks also expect the rise of US Dollar.


Forward contracts on the one hand minimize risks, but on the other hand may drive to profit loss because in case the fall of US Dollar a company was missed a chance to pay less for the equipment.


Futures in contrast to forward contracts have standard maturity dates and fixed amounts of currency volumes. This peculiarity lets them to be sold as common securities. For futures trading there is futures market. Average time of futures circulation is about 3 months.


Options are the same as futures but they reduce liabilities of the counterparties. Thus if you buy futures you have to close a deal according to the agreed conditions, if you buy options you may refuse to close a deal. Options are traded at the options market.


Swaps – a type of conservative operations when counterparties close buy/sell transactions with the liability to execute a reverse deal in a certain period of time. For instance, a company buys from a bank 1000 US Dollars for rubles at spot quote with the liability to sell 1000 USD for rubles back to the bank in a month at spot quotes which will be at Forex in a month. Swaps are non-standard contracts that are why they are not traded at the separate market.


Among all described conversion operations (financial instruments) for a private investor spot operations are the most important.

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