Forex derivatives are financial instruments that derive their value from changes in foreign exchange rates. They are commonly used by traders and investors to hedge against currency risks or to speculate on future exchange rate movements. The global forex derivatives market is one of the largest financial markets in the world, with a turnover of trillions of dollars each year.
According to the Bank for International Settlements (BIS), the global forex derivatives market had a turnover of $6.6 trillion per day in April 2019. This represents an increase of 29% from the previous survey in April 2016, when the daily turnover was $5.1 trillion. The growth in the forex derivatives market can be attributed to several factors, including the increasing globalization of trade and investment, the rise of emerging market economies, and advances in technology that have made it easier and cheaper to trade forex derivatives.
The forex derivatives market is composed of several different types of instruments, including forwards, futures, options, and swaps. Each of these instruments has its own unique characteristics and uses. Forwards and futures are agreements to buy or sell a specific amount of currency at a predetermined price and date in the future. Options give the holder the right, but not the obligation, to buy or sell a currency at a predetermined price and date in the future. Swaps are agreements to exchange one currency for another at a specified rate, with the exchange occurring at predetermined intervals over a certain period of time.
The most commonly traded forex derivative is the currency swap, which accounted for 49% of the global forex derivatives market in April 2019. The daily turnover of currency swaps was $3.2 trillion, up 32% from the previous survey in April 2016. Currency swaps are commonly used by corporations and financial institutions to hedge against currency risks or to fund investments in foreign currencies. They are also used by central banks to provide liquidity to the foreign exchange market.
The second most commonly traded forex derivative is the forward contract, which accounted for 27% of the global forex derivatives market in April 2019. The daily turnover of forward contracts was $1.8 trillion, up 24% from the previous survey in April 2016. Forward contracts are commonly used by corporations and investors to hedge against currency risks or to lock in a favorable exchange rate for future transactions.
The third most commonly traded forex derivative is the forex swap, which accounted for 15% of the global forex derivatives market in April 2019. The daily turnover of forex swaps was $1 trillion, up 16% from the previous survey in April 2016. Forex swaps are commonly used by corporations and financial institutions to hedge against currency risks or to fund investments in foreign currencies. They are also used by central banks to provide liquidity to the foreign exchange market.
The remaining 9% of the global forex derivatives market is composed of forex options and forex futures. Forex options are contracts that give the holder the right, but not the obligation, to buy or sell a currency at a predetermined price and date in the future. Forex futures are contracts that require the holder to buy or sell a currency at a predetermined price and date in the future.
In conclusion, the global forex derivatives market is a vast and complex financial market that plays a critical role in the global economy. With a daily turnover of $6.6 trillion, it is one of the largest financial markets in the world. Currency swaps, forward contracts, and forex swaps are the most commonly traded forex derivatives, accounting for over 91% of the global forex derivatives market. As the global economy continues to become more interconnected, the demand for forex derivatives is likely to continue to grow, making it an important market for investors and traders alike.
