There are several instruments that may seem similar among financial derivatives such as futures contracts and swaps. But, if not properly distinguished from each other, they can potentially result in significant losses. Forward and futures, and swap, is an example of this.
They all have in common that they can be used to help individuals and organizations to hedge against risks. Or instead, it can be used for speculative purposes. They are now all marking their way to bitcoin markets.
This is another thing they have in common. The below will quickly recap the definitions, with futures and swap already covered extensively before. To trade in forex market which is one of the types of the financial markets, trade with the best forex broker.
Futures and Forward Contract
Fundamentally, futures and forward contracts have the same function. Both types of contracts allow people to sell or buy at a specific time a specific type of asset in the future at a given price. However, forward contracts are unlike future contracts.
Forward contracts which are instuments like futures contracts and swap referred to private agreements between two parties and are not as rigid in their stated conditions and terms. The characteristic of forwarding contracts is as follows.
forward contracts are provided by the commercial banks and these contracts are not-standardized. This characteristic tells us that you can have forward contracts for any amount of money. There is an implication that forward contracts obligate you to sell or buy currency at the specified exchange.
And the forward contracts are not tradable. In the over-the-counter market, is the forward trade. They do not trade on an exchange such as the NYMEX, NYSE, or CME. The transaction is settled in one of the two ways when a forward contract expire.
The first way is the delivery process. The party that is long the forward contract under this type of settlement, when the asset is delivered and the transaction is finalized, the party that is short the position will be paid by the forward contract position.
For the party holding the short position, maybe will be difficult to understand the implementation of delivering the underlying asset, while it is simple to understand the transactional concept of delivery. Through a process known as cash settlement, forward contracts can also be completed.
Futures Contracts and Swap as Another Type of Derivative Instruments
The obligatory and non-standardized characteristic of forward contracts, for export-import, it work well because they payables in foreign country or deal with any specific amount of account receivables. One type of derivatives instrument is defined by the forward contracts.
The derivative instrument concept like futures contracts and swaps is hard to understand for most investors. However, since the governmental agencies use typically the derivatives, asset management firms, banking institutions, and other types or corporations, it is important to have a general knowledge about it.
The general knowledge includes how these instrument used by investment professional and what these instruments represent. There is another type of derivative instrument called swaps. This one of derivative instruments uses the counterparties to exchange the cash flow of one party’s financial instrument.
This cash flow will be exchange for cash flow of the other partys financial instrument. To exchange one stream of cash flows against another stream, the two parties reach an agreement, with these streams being known as the legs of the swap.
When the cash flows are estimated and due to be paid, the swap agreement determines the date. When we talk about currency swap, we mean fixed-rate interest payment on an equal load in another currency (exchanging payments).
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