What Are Foreign Currency Derivatives?

Foreign exchange derivatives are financial products whose prices depend on the prices of other assets. Then, we can know that in addition to spot transactions, foreign exchange forwards, futures, options, swaps, etc. belong to the category of derivatives.

Forex derivatives

Right!

Foreign exchange derivatives are financial products whose prices depend on the prices of other assets. Then, we can know that in addition to spot transactions, foreign exchange forwards, futures, options, swaps, etc. belong to the category of derivatives.

Chinese name

Forex derivatives

Origin

1997

Include

Foreign exchange forward contract

Derivatives

Forex Futures

The earliest foreign exchange derivatives in China originated in 1997. At that time, due to the relatively stable exchange rate, they were not very active. The real foreign exchange derivatives should be officially launched on July 21, 2005. The RMB will transition to flexible management. With the increase in floating, market entities have increased their management requirements for the currency between RMB and foreign exchange.

So far, China's foreign exchange derivatives are mainly forward and swap products, and options and futures have not yet appeared. The bank's forward products to customers began in 1997, and in August 2005, the State Administration of Foreign Exchange relaxed the bank's forward foreign exchange settlement and sales. After 2005, all banks are required to apply to the State Administration of Foreign Exchange as long as they have a financial derivative business license and a foreign exchange settlement and sales business license issued by the China Banking Regulatory Commission. It includes branches of some foreign banks. In August 2005, the People's Bank of China and the State Administration of Foreign Exchange announced the introduction of bank-to-bank forward foreign exchange transactions, with no restrictions on the content of the transactions.

Foreign exchange derivatives are a type of financial contract. Foreign exchange derivatives usually refer to foreign exchange trading instruments derived from native assets. Its value depends on one or more underlying assets or indexes. The basic types of contracts include forwards, futures, swaps (swap) and options. Foreign exchange derivatives also include structured financial instruments with one or more of the characteristics of forwards, futures, swaps (swap) and options.

Forex novices can learn the following suggestions:

1. If you want to improve foreign exchange knowledge, the basic knowledge is necessary. It is recommended to read the following "Introduction to Gold Forex Trading", "Japanese Candle Chart Curve", "Ultra Short-Term Master" and "Forex Trading AZ". You can also collect information online. FXSOL Global Free Online e-book download contains free e-books of various foreign exchange technologies.

2. Select a mainstream platform (if the platform is regulated by FSA or NFA, it means that their operations and capital flows are more standardized and serious, which guarantees the safety of investors. The UK s FSA regulation is the most stringent, and the popularity of FXCM and FXSOL is relatively high. high.

3. Choose a good agent, preferably a first-level agent. At the regular level, word of mouth is slowly settling, so the operations are very regular. No commissions and other fees, timely service and professional quality, and also guarantee the safety of your funds.

4. It is important to set stop loss and control positions when trading.

5. Maintain a good mentality and profit is normal. (Note: Of course, you also need to know some basic foreign exchange knowledge.)

If you are new to foreign exchange, you can first go to FXSOL Global Gold Exchange to apply for a foreign exchange simulation account, experience the basic steps of simulated foreign exchange speculation, slowly you will learn, and finally you can learn more about foreign exchange

The basic characteristics of foreign exchange derivative product transactions are: margin trading, that is, as long as a certain percentage of the margin is paid, the full transaction can be performed without the actual principal transfer. Contracts that perform by physical delivery will require the buyer to pay the full price. Therefore, the trading of financial derivatives has a leverage effect. The lower the margin, the greater the leverage effect and the greater the risk.

Foreign exchange derivatives are a type of financial derivatives.

mainly include:

(1) Foreign exchange forward contracts

A foreign exchange forward contract is an agreement between the two parties in the transaction to buy or sell a certain amount of financial products at a certain price in the future or a certain date. Foreign exchange forward contracts are the longest and simplest method of trading in financial derivatives, and the basis of several other basic derivatives. A new product that has developed rapidly in recent years is the forward rate agreement.

(2) Foreign exchange futures

Foreign exchange futures are developed on the basis of commodity futures and are a form of financial futures. Foreign exchange futures are standardized contracts that promise to buy or sell a financial asset at a specific time in the future. Its quantity, quality, and delivery time are all set, and the only change is the price. The contract transaction object of foreign exchange futures is various currencies. The principle of foreign exchange futures trading is the same as the principle of commodity futures trading, which uses the convergence of futures price and spot price fluctuations. When the futures contract is close to delivery, the futures price and spot price will tend to be consistent. In the spot and futures markets, the transactions of the same variety, quantity, and delivery period are in the opposite direction, and the profits in one market make up for the losses in the other market, so as to avoid the risk of price fluctuations. Features: The transaction is a standardized contract transaction; the transaction is a margin transaction; the foreign exchange futures market is a tangible market; the transaction implements a membership system and a daily settlement system; the participants are hedgers and speculators. The hedging method in foreign exchange futures trading is basically the same as the general commodity hedging method. The basic method can be two methods: long hedging and short hedging.

(3) Currency options

A currency option is a contract of rights, which means that after paying a certain fee (called an option fee), the buyer has the right to purchase or sell a financial asset at an agreed price or within an agreed period. According to the buyer's rights, options can be divided into call options and put options. The former means that the buyer has the right to purchase certain financial assets at the agreed price, and the latter means that the seller has the right to sell certain financial assets at the agreed price. The buyer of an option has the right to buy or sell, but has no obligation to buy or sell.

(4) Currency swap

Currency swap is a transaction in which both parties agree to exchange a certain amount of two currencies at a certain exchange rate. When the agreement expires, the two parties exchange their currencies at the same exchange rate. During this period, both parties pay each other's interest based on the amount exchanged. As financial innovation activities continue, on the basis of traditional currency swaps, many new swaps have appeared, mainly including: forward swaps, index swaps, cartel swaps, and breakable swaps. , Expandable interchange, and so on. The main activities of the foreign exchange derivatives market involve currency swaps, currency futures, and mixed transactions of the aforementioned transactions. From a financial perspective, currency futures trading, like interest rate swaps, are closely linked to global capital markets. The uniqueness of the foreign exchange derivative product market is that the universality and liquidity of foreign exchange derivative products largely depend on exchange rate fluctuations, which affects the cost of raising funds abroad and the returns of international portfolio investments for companies engaged in multinational business. A group or company must be proficient in using the foreign exchange derivatives market in order to implement effective risk management.

The functions of foreign exchange derivatives are in three aspects:

(1) Avoiding and managing systemic financial risks. According to statistics, systemic risks account for about 50% of the investment risks in financial markets in developed countries. Preventing systemic risks is the top priority of risk management for financial institutions. Traditional risk management tools such as insurance, asset-liability management, and securities portfolios cannot prevent systemic risks, but foreign exchange derivatives can use their unique hedging and hedging functions to effectively avoid adverse changes in market prices of basic products such as exchange rates Systemic risks.

(2) Strengthen the overall anti-risk capability of the financial system. Financial derivatives have the function of evading and transferring risks. They can transfer risks from individuals with a weak tolerance to individuals with a strong tolerance, and transform the powerful impact of financial risks on companies with a weak tolerance into those with a strong tolerance. Small or appropriate shocks from enterprises or investors have even turned into profit opportunities for speculators, which strengthens the overall wind resistance of the financial system and increases the stability of the financial system.

(3) Improve economic efficiency. This mainly refers to improving the efficiency of business operations and the efficiency of financial markets. The former is to provide enterprises with tools to better avoid financial insurance, reduce financing costs and improve economic benefits; the latter is to greatly enrich and improve the financial market system with more than 20,000 product types, reducing information Symmetry, to achieve a reasonable allocation of risks and improve pricing efficiency.

The four most basic types of foreign exchange derivatives: 1. Foreign exchange swap transactions: The two parties who signed the swap contract agreed to exchange assets regularly within a certain period of time.

Second, foreign exchange options trading: option contracts can allow contract holders to buy / sell in the future at a price determined today, but also a right, not an obligation.

3. Foreign exchange futures trading: The buyer or seller of a futures contract submits a deposit at the beginning of the transaction as a buffer mechanism after price changes. The margin is adjusted regularly based on changes in the contract price.

Fourth, foreign exchange forward transactions: Similar to futures, but without a margin system, is a non-standardized forward agreement.

Newbies are advised to make the following preparations before investing. Less detours for novices. 1. Don't listen to friends from Laohui who don't need to read books or technical information. I think that some novice foreigners must know the basics of foreign exchange. For example, do you know what is the K line, what is the pressure line, how to use templates, how to use 5 moving averages, and so on. 2. Candle Curve Chart This book is completely a Forex Bible. It is recommended that you read this must-read book for Huiyou. 3. Look at the data. There is nothing more convincing and learning than data. Communicate more. 4. Once invested, do not invest in the early stage, and no investment is required, because you can apply for a demo account. When you feel like you have simulated, you are investing. 5. Choose the mainstream platform, don't touch the Hey platform, all the boxes are newcomers. What else is there, I don't believe it. 6. Treat gold speculation as financial management, not speculation. I feel this is a financial management direction. People who want to manage money, invest, and not speculate, all speculators are gamblers. 7. Right. If you are a novice, you can go to Global Forex Group to register for a foreign exchange demo account first, and register for free to play. See how the simulated foreign exchange speculation is so speculative, and slowly you will understand.

Foreign exchange derivatives can be hedged and speculatively profitable, and can reduce or accept risks. This unique duality makes it difficult to control derivatives; therefore, foreign exchange derivatives have risks and returns.