Currency transactions are transactions that are regulated by international agreements or national legislation using currency values.
Types of Currency Transactions
1. Currency derivatives transactions (futures, forward) - these are transactions during which the parties agree on the delivery of a certain amount of currency within a specified time after completion of the transaction at the rate fixed at the time of conclusion. Currency derivatives transactions have two features.
The exchange rate is fixed at the conclusion of the transaction, although it is executed after a certain period of time.
There is a time interval between the conclusion and execution of the transaction. The due date, that is, the supply of currency, is defined as the end of the period from the date of the transaction or another period within the term.
With foreign currencies derivatives transactions are made:
- in obtaining due to the exchange rate difference of speculative profit;
- in case of insurance abroad of direct or portfolio investments against possible losses in connection with a decrease in the exchange rate of the currencies in which they are made;
- upon exchange (conversion) for commercial purposes, that is, the advance sale of foreign exchange earnings or the purchase for future payments of foreign currency.
The use of derivatives transactions to cover the currency risk during commercial transactions became widespread in the 70s during the transition to floating exchange rates.
2. Foreign exchange operations of SPOT banks are the most common. They make up 90% of the total volume of foreign exchange transactions. Their essence lies in the purchase and sale of currency, subject to the supply by banks on the second business day from the date of the transaction at the rate that was fixed at its conclusion. At the same time, business days are considered for each of the currencies that participate in the transaction. That is, if the next day of the transaction date is non-working for one of the currencies, then the currency delivery period becomes one day longer, and if for the other currency the next day is non-working, the delivery also increases by one day.
In such transactions, the currency is delivered to the accounts indicated by the recipient banks. The transfer of currencies in a two-day period was previously dictated by the objective difficulties of its implementation in a shorter time period; moreover, an analysis of the currency operations of a commercial bank was required.
The most mobile element in foreign exchange positions is the operations of banks in the foreign exchange market with urgent delivery, but at the same time they involve some risk. Using the “SPOT” operation, banks provide customers with foreign currency needs, carry out speculative and arbitrage operations, transfer capital from one currency to another.
3. SWAP transactions are a type of transaction that combines cash foreign exchange transactions of banks. Similar banking operations have been known since medieval times, when Italian bankers conducted operations with bills. Later they began to develop in the form of deport and report operations. A deport is a combination of interconnected transactions in the reverse order of reporting in which cash sale of foreign currency is carried out and its purchase for a period.
Later, the foreign exchange operations of the banks “SWAP” acquired the form of exchange of deposits for equivalent amounts in various currencies. The disadvantage of this operation was an increase in the bank's balance sheet, which created additional risks and worsened ratios. Currency operations of banks “SWAP” solve these problems, accounting is done on off-balance sheet items, which means that currency exchange is carried out in the form of sale.
“SWAP” combines the purchase and sale of currencies on the condition of immediate delivery with counter-transaction with the same currencies for a certain period. At the same time, two partners (corporations, banks and others) agree on counter payments.