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Spot Markets and the Forwards and Futures Markets

Spot Markets and the Forwards and Futures Markets

The above are terms that are very common in Forex trading. So as to understand this kind of trading, it is important to understand the terms and what exactly they mean.

Spot market

The spot market is the place where buying and selling of currencies are done in accordance with the prevailing price. This is the price that is usually determined by demand and supply and it is a reflection of very many things that include economic performance, interest rates, ongoing situations politically either internationally or locally, and the perception of how the future performance of the currency will be like against any other.

When ideas are finalized, the deal is called a spot deal. This is a transaction that is bilateral where one party is to deliver a currency in accordance with the agreement to another person who then receives an amount as specified in yet another currency. The amount to be received is based on the prevailing exchange rate. When a position is closed, the settlement is often done in cash.

The spot market is commonly closely associated with deals that are present instead of the future ones. However, even though this is the case, the transactions will often be settled in a period of two days.

The forwards and the futures markets

The forwards and the futures markets are quite different from the spot market. This is because they do not deal with any actual currencies. Instead of currencies, they deal with contracts, which are a representation of claims to a given kind of currency, a futures settlement date, as well as a specific price for every unit.

As for the futures markets, it deals with the buying and selling of futures contracts. This is usually based on the standard size as well as the settlement date on any public commodities or markets. The futures markets are highly regulated. The futures contracts usually come with very specific details and this includes the units that are traded as well as the dates for settlement and delivery. The minimum price increments are also included and there is no way that they can be customized. The exchange carried out usually acts as the trader’s counterpart and provides the needed settlement and clearance.

The two types of contracts are legally binding. The contracts can be settled for cash for the kind of exchange that is in question when the expiry date comes. However, even before expiry, it is still possible to buy and sell the contracts.

The best thing about the forwards and the futures markets is the fact that they do offer some form of protection against any risks as one trades the currencies. These are markets that are utilized by the large international corporations so as to hedge against any fluctuations in the exchange rates in future. These speculators still take part in these kinds of markets too.

It is important to note that terms such as currency market, foreign-exchange market, Forex, and FX are all terms that mean the same thing. This means that they are synonyms and they all mean Forex market.

Source by Shalini Madhav

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