Contract date and value date are fundamental terms of any trading deal. First one determines when parties reach an agreement on all essential conditions of the deal. Second one defines a moment when final settlement is done and monetary funds become available to a contractor. For non-cash currency conversion a value date is a calendar day when actual exchange will be done through delivery of purchased currency and transfer of sold currency. Value date can only fall on a banking day.
On Foreign exchange market trading may be done for both immediate delivery and for deferred delivery in future so with regard to value date all deals may be split into groups – spot and forward.
Notwithstanding that spot trading means immediate delivery, traditionally settlement is done within two working days from the date of trade execution (i.e. value date is a second day from a contract date). This time is needed for the paperwork involved and bank money transfers. Otherwise it’s practically impossible to effect synchronous fulfillment of the parties’ obligations under the deal, especially when they located in distant time zones. Another two types of spot deals are called TOD (a value date is set for the same day as a contract date) and TOM (with next day value from a trade execution). They appeared as a result of improvement of interbank telecommunications, primarily electronic wire transfer systems. Also TOD and TOM deals are widely spread on a country’s internal interbank market.
In forward or future contracts a value date outstands from contract date for more than two business days. Numerous variations of forward, future, option and swap contracts are traded on Forex market. All of them presume currency exchange under rate, agreed today, with the settlement deferred for some time in future. The essential condition of the deal – currency, amount, exchange rate and value date – must be decided upon closure of the transaction. Term of forward operation may vary from 3 days till 3 years but most common are 1, 3, 6 and 12 months periods. It’s worth mentioning that forward prices are relatively stable for periods lesser than 6 months while for longer period market is very volatile and even single transaction could cause significant price fluctuations.
Futures contracts are very similar to forward contracts, except they are exchange-traded and thus defined on standardized assets. A forex swap is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward). In general a swap could be considered as a portfolio of spot/forward contracts, concluded by the same parties. Relating to FX-swaps value date is a date of initial deal execution and a date of reverse deal closure is called swap termination or maturity date. Commonly swaps are arranged for a period less than one year.
Apart from other types of forward contracts an option grants the buyer the right, but not the obligation, to engage in some specific transaction on the asset, while the seller incurs the obligation to fulfill the transaction if so requested by the buyer. In other words, the owner of an options contract may exercise the contract or may not. Instead of value date most options have an expiration date – if the option is not exercised by the expiration date, it becomes void and worthless.
Spot trading is prevailing on Foreign Exchange market. Some deals suppose actual delivery of purchased currency, others are done just for margin profiting. In second case settlement of the deal is replaced by obligation to close the position through reverse transaction. And when the position is closed the margin is credited to the customer’s account as a profit or debited as a loss.
