Foreign exchange spot trading is buying one currency against a different currency for immediate delivery. The standard settlement timeframe for Foreign Exchange Spot trades is two business days from the date of trade execution.
Forward (fx swap)
A financial instrument in which two counterparts exchange two different currencies for a determined period of time. It consists of two legs: an FX spot transaction, and an FX forward transaction, regulated by two exchange rates whose difference in points represents the differential between the interest rates of the two currencies object of the dealing.
A deposit contract is a financial instrument where currency is borrowed or lent for a determined period of time at a fixed interest rate. On the maturity date the borrower/lender will therefore pay/receive interest on top of the initial capital.
A currency option is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.
A forward rate agreement (F.R.A.) is a forward contract in which one party pays a fixed interest rate, and receives a floating interest rate equal to a reference rate (the underlying rate). The payments are calculated over a notional amount over a certain period, and netted, i.e. only the differential is paid. It is paid on the effective date. The reference rate is fixed zero, one or two days before the termination date, dependent on the market convention for the particular currency
Eonia (Euro Over Night Index Average) is an effective overnight rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market. It has been initiated within the euro area by the contributing panel banks. It is one of the two benchmarks for the money and capital markets in the euro zone (the other one being Euribor). The Eonia is therefore a contract in which two counterparts exchange a fixed interest rate against the Eonia rate (variable).
In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty. The fixed or floating rate is multiplied by a notional principal amount. This notional amount is generally not exchanged between counterparties, but is used only for calculating the size of cash flows to be exchanged.
An option on an IRS
Repurchase agreements (or repos) are financial instruments used in the money markets and capital markets. What occurs is that the cash receiver (seller) sells securities, in return for cash, to the cash provider (buyer), and agrees to repurchase those securities from the buyer for a greater sum of cash at some later date, that greater sum being all of the cash lent and some extra cash (constituting interest, known as the repo rate). There are three types of repo maturities: overnight, term, and open repo. Overnight refers to a one-day maturity transaction. Term refers to a repo with a specified end date. Open simply has no end date. Although repos are typically short-term, it is not unusual to see repos with a maturity as long as two years.
Interest rate Caps, Floors and Collars
An interest rate cap is a derivative in which the buyer receives money at the end of each period in which an interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive money for each month the LIBOR rate exceeds 2.5%. The interest rate cap can be analysed as a series of European call options or caplets which exists for each period the cap agreement is in existence.
An interest rate floor is a series of European put options or floorlets on a specified reference rate, usually LIBOR. The buyer of the floor receives money if on the maturity of any of the floorlets, the reference rate fixed is below the agreed strike price of the floor.
An interest rate collar is a security which combines the purchase of a cap and the sale of a floor to specify a range in which an interest rate will fluctuate. The security insulates the buyer against the risk of a significant rise in a floating rate, but limits the benefits of a drop in that floating rate.