Transaction Operations

Topic Cover |  Market, Deposit operations, Transaction

Being a financial asset, gold can yield revenue if lent. These operations are executed when it is necessary to attract a metal in the account or deposit it for a certain period of time. Gold deposit rates are usually lower than currency rates, which can be explained by high currency liquidity. Standard deposit periods are 1, 2, 3, 6 and 12 months, but they can be changed. Bank attracting precious metals within the framework of deposit contracts can use them for making profit during some time, for instance, financing gold mining or for arbitrage operations, etc. Owners of gold get income from invested gold and avoid expenses of storing a physical metal.

Forwards

Except for the operations mentioned above, other transactions can be executed on the world market. For instance, forward deals which provide for real metal delivery during more than two business days. Making such deal, a buyer ensures himself against gold price increases on the spot market in future. Insurance implies fixing the price which mutual settlement will be executed at. However such deal does not give the possibility to use more auspicious conjuncture. Forward cannot be cancelled. It can be only balanced (forward position is closed) by buying and selling of the stipulated by the deal amount of metal at the current price with future selling it at price the stipulated by the forward contract. Such transactions are made frequently on the interbank gold market. If selling a metal for exact period is necessary, a seller works it off under conditions of spot and then makes a swap deal: he buys a metal on conditions of spot and sells it on conditions of forward at the same time.

Transactions with CFDs

We were considering physical metal markets’ organization and functioning before. However, tehre is another point of trading virtual instruments that arouses interest.

There are hardly any events that had such influence on the financial markets as CFD introduction.

The era of unprecedented interest and exchange rates started in the 1970-ies and gave rise to the need for new financial instruments which could be used for managing increased risks. Prosperity of derivative financial instruments industry is connected with its possibility of fast and effective reacting to changing market tendencies. Eventually, a virtual section of the gold market became an independent field with huge turnover which was many times bigger than that of the physical market.

Future (futures contract) is a legal contract binding the parties; one party agrees to execute and the other – to accept delivery of goods in certain amount (and of ertain quality) at a definite time in future at the price set while contract concluding. In world practice, gold futures contracts are traded on several stock exchanges, and the biggest amount of gold contracts is concluded on COMEX in

 New York. Operations with gold have been executed since 1974 there. The main aims of futures
operations are hedging and speculation. Such deals are especially attractive as you do not need to have much money or many goods. Small investments can bring much profit provided the conditions are suitable.

Another popular form of fixed-term contracts is gold options introduced in 1976 and widely spread in 1982 after their execution in the USA.

Option is a fixed — term contract. The client can either buy a call option or sell a put option of a certain standard amount of goods at a fixed price on the exact date (European options) or during the whole specified period of time (American options). The seller of the option sells the right to the counterpart to execute the transaction or cancel the deal. The buyer of the option pays for this right to the seller – option money. The buyer has the right to exercise the option at a fixed price. Therefore, the active party in transactions with the options is the buyer, because this person makes a decision on fulfillment of conditions of the option contract.

Option transactions are often used for hedging. So, if the investor hedges against risks of increases in the gold price, he will be able to buy a call option or sell a put option; if the investor hedges against risks of decreases in prices, he will be able to sell a call option or buy a put option.Compared with other instruments of hedging, an option is attractive, because, besides fulfillment prices fixing to hedge against adverse changes in market conditions, it gives the opportunity to take advantage of favourable conditions. In addition, options promote development of speculative operations.

The maximum size of losses of the buyer is limited by the paid bonus, the gains are potentially unlimited. Consequently, the situation for the seller is vice versa.

Options can be involved in over – the – counter market. Such options are called dealer's options. Their main distinction is that they are not issued by an exchange, but an actual legal entity that guarantees the execution of the option