Spot Market forex
Forex trading in the spot market has always been the biggest because it trades the largest underlying real assets of the forward and futures markets. Previously, volumes in the forward and futures markets exceeded those in the spot markets. However, trading volumes in the spot forex markets received a boost with the advent of e-commerce and the proliferation of forex brokers.
The spot market is where currencies are bought and sold based on their trading price. This rate is determined by supply and demand and is calculated based on several factors, including current interest rates, economic performance, sentiment towards ongoing political situations (both domestic and international), and the perception of the future performance of one currency against another. The final deal is known as a spot deal. It is a bilateral transaction in which one party delivers an agreed amount of currency to the counterparty and receives a specified amount of another currency at the value of the agreed exchange rate. After the position is closed, the settlement is in cash. Although the spot market is generally defined as the market that deals with transactions in the present (rather than in the future), these trades actually take two days to settle.
Futures Markets and Forwards
A futures contract is a private agreement between two parties to buy a currency at a future date and at a predetermined price in the OTC markets. A forward contract is a standardized agreement between two parties to receive a currency at a future date and at a predetermined price. Futures contracts are traded on exchanges rather than over-the-counter.
Unlike the spot market, the forward and futures markets do not trade in actual currencies. Instead, they deal in contracts that represent claims for a specific type of currency, a specific price per unit, and a future settlement date.
In the futures market, over-the-counter contracts are bought and sold between two parties who set the terms of the agreement between them. In the futures market, futures contracts are bought and sold based on standard volume and settlement date in public commodity markets, such as the Chicago Mercantile Exchange (CME).
In the United States, the National Futures Association (NFA) regulates the futures market. Futures contracts contain specific details, including the number of units being traded, delivery and settlement dates, and minimal price increments that cannot be customized. The exchange acts as a counterparty to the trader, and provides clearing and settlement services.
Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The currency forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.