As I know, a forward contract is a contract in which a buyer and a seller agree to buy and respectively sell a certain instrument (be it commodity, currency, indexes, others) at a certain date in the future and for a price agreed upon today.
The contract can be executed only at its due date and according to the actual price for the instrument at the actual date, one of the buyer or the seller will register either a profit or a loss (zero sum game).
A futures contract is pretty similar to the forward contract only that it can fluctuate throughout its life period and either the buyer or the seller can close their position at any time, not only at the due date, as is the case for a forward contract.
A spot contract is a contract where a buyer and a seller buys and respectively sells a certain instrument at the current price.
So in conclusion you can trade on the spot, forward or futures. You can either trade for speculation or for hedging (as is the case with banks, commercial entities, etc).
A swap contract is a contract in which you and another party agree that you will sell a certain instrument in exchange for another and then at a certain date in the future you will exchange again, therefore you at the end will own the instrument initially exchanged and the same is valid for the other party. Also, one of the parties will register a profit and another one a loss, so this type of operation is also a zero sum game.
You can swap currencies, interest rate instruments, different maturity instruments, etc. This is done by the banks who try to cover their interest, maturity and currency gaps as they try to match their assets with the corresponding liabilities and thus not to becom imbalanced.
Hope my explanation helped you and please see also the following links (googled):
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Joined Oct 2006
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Status: Order in Chaos
|213 Posts
So a swap rate's "swap back" is mandatory and the date is set beforehand?
For example, if trader A and B agree to swap an instrument at a designated time, do they have to decide the time they will swap it back?
What exactly is closing a futures position? - You mean the ones who initially issued it, or just people trading it? How does this work? I know futures' purpose is for hedging, etc. But at the same time, like all instruments, they are traded by traders, who have no interest in hedging.
What is an example of an interest rate instrument? I know maturity instruments are things like bills,bonds... but I've never heard of interest rate instruments; maybe I know what they are just never heard of this term...
