What is Spot, Forwards and Futures Markets ?
There are actually three ways that institutions, corporations and individuals trade Forex the spot market, the forwards market and the futures market. The Forex trading in the spot market always has been the largest market because it is the real asset that the forwards and futures markets are based on.
In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. With the advent of electronic trading and numerous Forex brokers the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors.
What is the spot market?
The spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations as well as the perception of the future performance of one currency against another.
When a deal is finalized, this is known as a “spot deal”. It is a bilateral transaction by which one person delivers an agreed-upon currency amount to the counter person and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present, these trades actually take two days for settlement.
Forwards and Futures markets?
The forwards and futures markets do not trade actual currencies. They deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement.
In the forwards market, contracts are bought and sold OTC between two person, who determine the terms of the agreement between themselves.
In the futures market, Futures contracts are bought and sold based upon standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S. the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.