Futures
Futures Glossary
Products- Other Investments
- Foreign Exchange
- The Basics
Foreign Exchange
The Basics
Foreign Exchange is the largest of the global financial markets. Daily trading volume in the currency markets is estimated to be 1.1 US trillion dollars.
The volatility seen in the currency markets can create potential risk as well as opportunity for clients. Our FX sales specialists can provide advice on hedging currency exposure, transacting foreign exchange or exploring investment opportunities in currency-linked products.
Spot Transactions and Conversions
The purchase or sale of a currency against another for immediate delivery (generally two business days after the trade date.) For example, a U.S. manufacturer has to pay its overseas parts supplier in Japanese Yen. The client locks in a spot rate today and will wire the U.S. funds into its account for settlement in two business days.
Conversions - Non-credit sensitive* FX transactions for immediate delivery (generally same day). The funds for conversion must be in your Smith Barney account before the transaction is done. For example, the client is closing on a property in the UK. He or she needs to pay in British pounds. We can convert the required US dollars from the client's Smith Barney account to British pounds and wire the currency as per the client's instructions.
Foreign Exchange Forwards and Swaps
A forward contract is a contractual obligation to buy or sell a specific amount of foreign currency against another at a specific price for delivery at a future date. The forward price (rate) is determined by the spot rate and the interest rate differential between the two currencies For example, the client needs Euro for a payment due in May of next year; the client can lock in a forward rate today to purchase Euro for settlement in May of next year.
A swap is a simultaneous buy and sell of a foreign currency amount for two different settlement dates. A swap is done to reschedule foreign currency payments.
Over-the-counter (OTC) Currency Options
Currency options are useful hedging tools, providing the option buyer with the protection against currency fluctuations, while still allowing the buyer to benefit from favorable currency movements. OTC currency options give the buyer the right to buy (call options) or sell (put options) a specified amount of a currency at a predetermined price (strike rate) on or before the option matures (expiry date). The OTC currency options market is a very liquid market with tight two way prices quoted round-the-clock. Premiums on options are settled two business days after trade date.
*Conversions are not credit-sensitive since the client will have for instance, the USD in their account to convert to another currency. Since the client is long the USD in their account, their is no risk since we are merely exchanging the 2 currencies.
Options involve risk and are not suitable for all investors. For general information on the uses and risks of options, you can obtain a copy of Characteristics and Risks of Standardized Options from Smith Barney, Options Department, 390 Greenwich Street, New York, NY 10013 or from your Smith Barney Financial Advisor.
Over the counter ("OTC") options have particular characteristics that you should be familiar with before trading. In particular, OTC options are issued by your counterparty and may not be traded in a secondary market, and may not be standardized in their terms. You should thoroughly understand the counterparty and credit risk, liquidity, marketability, settlement styles and pricing of any OTC option before transacting.
For more information, please contact your Smith Barney Financial Advisor.
