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Alternatives to Spot Forex?

July 16, 2012 by

When you hear about “Forex” you probably think about the spot Forex trading, usually online. But the foreign exchange market consists of several types of transactions that affect the currency prices and not all of them are part of the spot trading process. Before proceeding to the poll’s question, I will describe some of the most popular Forex trading types:

Spot Forex — the usual way to trade Forex. Spot currency trading does not involve delivery of currencies and is performed between two parties, using over-the-counter (OTC) electronic methods. It has the second biggest share in the daily FX turnover, following foreign exchange swaps (which are not tradable in retail market). Most of us are doing this type of trading.

Binary options — lately, one of the simplest ways to participate in currency trading. When trading binary options, you either win a predetermined amount of money if the currency pair is above or below the given target (called strike price) at some particular moment or you lose a predetermined amount of money if the currency pair fails to reach the price objective. Of course, there are other types of binary options available, but they all are characterized by the fixed risk/win amounts. They deserved their popularity partly due to qualifying as a nontaxable source of income in some countries.

Options — or vanilla options — are the special derivative contracts where two parties agree on transaction at a reference price (strike price). Vanilla options have a more confusing valuation model compared to the binary options. Currency options market is mainly OTC. Due to its complexity, it is not very appealing to an average FX trader.

Futures — the way currencies and currency indexes are traded in exchanges (for example, on ICE). Futures traders buy a delivery of currency on some particular date at a price determined today. Unlike spot Forex, futures trading is mostly regulated and remains popular even with the advent of the mass spot trading.

ETFs — ETF stands for an Exchange-Traded Fund, which can hold a currency or a basket of currencies, allowing traders to invest in those assets by buying the ETF via an exchange at a rather low cost. It is a handy tool to trade baskets of interconnected currencies for hedging purposes. ETFs also provide additional liquidity to the markets. More than 70 currency ETFs exist as of now.

Physical currency — while many of us participate in currency exchange when traveling abroad or buying imported goods, it is also possible to trade physical currency speculatively, buying and selling particular currencies according to your expectations. It was a popular method of investment in Iraqi dinar in late 2000’s and remains popular in some third-world countries.

Personally, I participate only in spot Forex trading currently but plan to taste binary and vanilla options trading in some not-so-distant future. And how about you?

What types of Forex trading are you involved in?

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If you know some other ways to participate in the global foreign exchange market, please feel free to share them using the form below.

3 Responses to “Alternatives to Spot Forex?”

  1. BigPiping

    Forward Rate Transactions. Similar to spot in that It involves purchasing one currency against another. However the tenor will vary spot trades typically have a tenor of trade date plus 2 days tenor (T+2), and forward rate transactions will have a tenor up to 1 year.

    Reply

    admin Reply:

    Thanks for info! Sounds similar to futures trading.

    Reply

  2. Tanja

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