Part III : Is Forex classified as a financial derivative?

Trading Capital

Derivatives markets typically feature uniform standards for the margin funds required to open positions. within the following lines, we’ll categorize the various forms of forex markets consistent with this rule.

Spot Market

In the spot forex market, online brokers provide leverage of quite 1:100 on the average. Moreover, there aren’t any definitive rules for determining the minimum capital that a trader must maintain to open trades. As long because the trader maintains the minimum margin set by the forex broker, his position will remain open. commodity exchange forex brokers usually lower the leverage during the weekends. the number of the cut depends on each broker’s assessment of its current conditions and therefore the limits to guard its business – but there are not any uniform market-wide rules for determining the specified margin sizes. The absence of those strict rules means the forex market can not be classified as a derivatives market.

Futures Contracts

All traders are required to take care of uniform minimum margin levels as per the principles imposed by the relevant exchange within the currency futures markets. The trader also must put aside an extra amount, as determined by the exchange, so as to be ready to carry over his trade to the following day. There are not any differences within the margin rules applicable within the futures markets and thus can not be classified under derivative products.

Vanilla Options

Traditional currency options trades involve buying or selling a call or put option. Buying a call or put option requires the trader to supply an amount adequate to the contract size multiplied by the premium to the exercise (execution) price. Similarly, selling a call or put option also requires the trader to produce an amount up to the worth of the contract multiplied by the premium of the exercise price, plus a margin of risk (writing an option involves unlimited risk). Each exchange applies uniform rules for margin, which place traditional currency options among the derivative products.

Binary Options

The binary options broker sets the minimum investment in each currency option contract. Some brokers allow additional investments (multiplication) after activating the choice contract, but all told cases the minimum and maximum additional investment depends on what the broker determines and not on the will of the trader. Thus binary options on currencies may be classified under derivative products.

Contracts For Difference

As with future contracts, the nondepository financial institution determines the margin funds required to open a CFD. The broker usually applies standard conditions for margin, and thus this kind of capital requirement requires the classification of CFDs under financial derivatives.

Swap

A swap rate (overnight interest or rollover fee) applies to holding a foothold on a currency pair to the following day to compensate each party to the transaction (trader and market maker) for the absence of actual delivery of the money in circulation. Not requiring the exchange of assets would have required the non-imposition of rollover fees (earned or paid), which might have meant classifying the trades under financial derivatives. we’ll apply this rule when searching for the assorted forex markets.

Spot Market

The forex broker applies a rollover or swap fee to the trading account just in case the trader keeps the buy or sell position open until the following day. Rollover fees could also be added or deducted from the account betting on the difference in interest rates between currencies. for instance, if a trader opens a brief position on EUR/USD, he will receive rollover interest for getting US dollars, and he can pay rollover interest for selling Euro. Ultimately, the difference between the 2 interest rates (taking under consideration the broker’s commission) will determine whether the swap number are positive or negative. These fees apply in the slightest degree forex brokers except in cases where a trader opens an interest-free account. Of course, we cannot classify the spot forex market within the derivatives markets on the idea of this rule.

Futures Contracts

No swap or rollover fee is levied on currency trading within the futures markets and is therefore classified as a derivative.

Vanilla Options

As with futures contracts, traditional currency options aren’t charged a rollover fee and thus will be classified as a derivative.

Binary Options

Binary options are nothing over a gage the movement of the value of an asset, and so no actual exchange of the underlying asset takes place, which suggests that the binary options trader avoids paying swap fees when trading currencies. Thus, we are able to classify binary options as derivative products.

Contracts For Difference

There is no SWAP fee for CFDs where the trades don’t seem to be settled or there’s a true exchange of the traded assets. Some brokers charge an overnight fee for his or her clients’ trades, but this can be not the case for everybody. Moreover, the CFD trader doesn’t in any way charge interest for his open positions, whether or not his broker charges him a rollover fee, unlike the case within the spot forex markets. Brokers apply this procedure, which can seem unfair, as some way of hedging risks within the assorted strategies required to act as a counterparty to transactions. Thus, contracts for difference may be classified under financial derivatives products.