--->

Types of transactions in which you’d use a currency converter calculator

There are several different types of foreign currency exchange transactions. A currency converter calculator could be used in any of them:

1. Spot transactions and currency converter calculators

Spot transactions represent about one third of all FX market transactions in which you’d use a currency converter calculator. In this case, the two trading parties agree on a currency exchange rate, and trade currencies at that rate. This type of scheme if often used when purchasing foreign goods. Payment is normally made two days later, but is sometimes made in one day.

Though popular, spot transactions expose the buyer to risks: fluctuations in exchange rates as shown on a currency converter calculator can raise or lower prices, causing difficulties in planning.

An alternative is to pay for the foreign goods right away, thus avoiding the exchange rate risk. But buyers rarely want to part with money any sooner than necessary.

2. Forward transactions and currency converter calculators

The forward transaction is one way to deal with foreign currency exchange risks. In such cases, money doesn’t actually change hands until an agreed upon future date. Essentially, a buyer and seller check their currency converter calculators and agree on a currency exchange rate for a date in the future. The transaction occurs on that date, regardless of how market currency exchange rates have fluctuated. The date can be as close as a few days, or it can be months or even years ahead.

• Futures: Foreign currency futures are forward transactions with standard contract sizes and maturity dates. For example 100,000,000 US dollars for next August at an agreed rate. These futures contracts are traded on a separate exchange, but can still entail use of a currency converter calculator.

• Swap: The currency swap is the most common type of future transaction. In a swap, the buyer and sell consult their currency converter calculators and exchange currencies for a fixed length of time, agreeing to reverse the transaction at a later, fixed date.

In all of the above transactions, market currency exchange rates – as shown on a currency converter calculator – might change. But the parties are locked into a contract at a fixed price, unaffected by any changes in the market rates. Such devices allow the market participants to reduce risk, since they know in advance what their foreign exchange rate will be, without even consulting their currency converter calculator. They also allow them to avoid an immediate cash payment.

3. Options and currency converter calculators

One of the problems with forward transactions is their lack of flexibility. To address this problem, the foreign currency option was developed. An “option” gives its owner the right (but not the obligation) to buy or sell a specific amount of foreign currency at a specific price – agreed upon after checking a currency converter calculator – at any time up to a specific date, at which time the option expires.

For a price, a trader can buy the right – but not the obligation – to buy or sell a currency at a set price on or before a set future date. The pre-agreed price is called the “strike price”, separate from the currency converter calculator rate on the expiry date.

Depending on which rate – the the current market rate listed on a currency converter calculator or the option rate – is more attractive, the option holder may exercise the option or simply let it lapse. This type of transaction allows the buyer more flexibility than a futures or swap contract.