Currency operations of banks: types and features

Currency transactions are transactions that are settled by international agreements or national legislation using currency values.

Types of currency transactions

1. Currency forward transactions (futures, forward) are transactions during which the parties agree on the delivery of a certain amount of currency after a specified period after the completion of the transaction at the rate fixed at the time of the conclusion. Currency foreign exchange operations have two characteristics.

The exchange rate is fixed at the conclusion of the transaction, although it is executed after a certain period of time.

Between the conclusion and execution of the transaction existstime interval. The term of execution, that is, the delivery of currency, is defined as the end of the period from the moment of the transaction or another period within the time limit.

With foreign currencies, futures transactions are made:

- in obtaining at the expense of the exchange difference of speculative profit;

- with insurance abroad direct or portfolio investments from possible losses due to the depreciation of the currencies in which they are implemented;

- when exchanging (converting) for commercial purposes, that is, in advance selling foreign exchange earnings or buying for forthcoming payments of foreign currency.

The application to cover the currency risk of futures deals during commercial transactions was widely spread in the 1970s during the transition to currency floating rates.

2. Currency operations of banks "SPOT" are the most common. They account for up to 90% of the total volume of currency transactions. Their essence lies in the sale and purchase of currency, provided that banks supply the second working day from the moment of the transaction at the rate that was fixed at its conclusion. In this case, working days are considered for each of the currencies that are involved in the transaction. That is, if the subsequent day of the transaction date is non-working for one of the currencies, the delivery period of the currencies becomes more than one day, and if the next day is non-working for another currency, the delivery is also increased by one day.

In such transactions, the delivery of currency is madeto the accounts indicated by the receiving banks. The conversion of currencies in the two-day period was dictated earlier by objective difficulties of its implementation in a shorter time period, moreover, an analysis of the currency operations of a commercial bank was required.

The most mobile element in currency positionsare the operations of banks in the currency market with an urgent delivery, but they involve some risk. With the help of the operation "SPOT" banks provide the clients' needs in foreign currency, carry out speculative and arbitrage operations, transfer of capital from one currency to another.

3. Swap transactions are a type of transaction that combines cash foreign exchange operations of banks. Such banking activities are known from medieval times, when Italian bankers carried out transactions with bills. Later they began to develop in the form of deportation and reporting operations. Deport is a combination of interrelated transactions in the manner opposite to the report in which the cash sale of foreign currency and its purchase for a period is carried out.

Later, foreign exchange operations of banks "SWAP" acquiredform of the exchange of deposits for equivalent amounts in different currencies. The drawback of this operation was an increase in the bank's balance sheet, which created additional risks and worsened the coefficients. Currency operations of banks "SWAP" solve these problems, accounting is made on off-balance sheet items, which means that the exchange of currencies is carried out in the form of purchase and sale.

"SWAP" combines the purchase and sale of currencies inthe condition of immediate delivery with counter-transactions with the same currencies for a certain period. At the same time, two partners (corporations, banks and others) agree on counter payments.