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OTC and exchange traded

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Published: 25th March 2017 by William Webster

Some derivatives like interest rate and currency swaps are traded directly between two parties. When they deal, they agree the amount, price, settlement date and maturity date of the transaction. Traditionally the details of these transactions are only known by the parties involved (but now regulatory reporting applies).

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Introduction Foreign exchange is defined as "a claim to a foreign currency payable abroad and may be funds held, bills or cheques". A foreign exchange transaction is, "a contract agreed today between two parties to trade an agreed amount of one currency for an agreed amount of another currency on a future date". When you travel you may be familiar with buying currency at the airport. Because the sums involved are small and paper money is exchanged the differences between buying and selling prices can be wide. You may also be unfortunate enough to pay a dealing fee. Banks, corporates and speculators deal in the professional market. Trades are transacted across electronic platforms and each trade can run into millions of dollars. As a consequence dealing spreads are very narrow and the money is exchanged by credits and debits to bank accounts. Let's find out about the spot and forward markets and the risks involved.


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Learn about the following: How the spot market works. What the spot price is. What happens when you do a deal. How the forward rate is calculated. How dealers make money. Why customers are important.