A:

The forex market is a very large market with many different features, advantages and pitfalls. Forex investors may engage in currency futures as well as trade in the spot forex market. The difference between these two investment options is very subtle, but worth noting.


A currency futures contract is a legally binding contract that obligates the two parties involved to trade a particular amount of a currency pair at a predetermined price (the stated exchange rate) at some point in the future. Assuming that the seller does not prematurely close out the position, he or she can either own the currency at the time the future is written, or may "gamble" that the currency will be cheaper in the spot market some time before the settlement date.

With the spot FX, the underlying currencies are physically exchanged following the settlement date. In general, any spot market involves the actual exchange of the underlying asset; this is most common in commodities markets. For example, whenever someone goes to a bank to exchange currencies, that person is participating in the forex spot market.

The main difference between currency futures and spot FX is when the trading price is determined and when the physical exchange of the currency pair takes place. With currency futures, the price is determined when the contract is signed and the currency pair is exchanged on the delivery date, which is usually some time in the distant future. In the spot FX, the price is also determined at the point of trade, but the physical exchange of the currency pair takes place right at the point of trade or within a short period of time thereafter. However, it is important to note that most participants in the futures markets are speculators who usually close out their positions before the date of settlement and, therefore, most contracts do not tend to last until the date of delivery.

For further reading, see Getting Started In Foreign Exchange Futures, Getting Started In Forex Options and Using Options Tools To Trade Foreign-Exchange Spot.





RELATED FAQS
  1. How is a share premium account taxed?

    Understand the difference between a spot rate and forward rate. Learn why someone would enter into a contract with a spot ... Read Answer >>
  2. How is the value of a pip determined?

    Learn how the pip is used in the pricing of a currency pair in forex trading, and see how the foreign exchange market is ... Read Answer >>
  3. What are the most common currency pairs traded in the forex market?

    There are many official currencies that are used all over the world, but there only a handful of currencies that are traded ... Read Answer >>
  4. Can I trade a currency when its main market is closed?

    In the forex market, currencies from all over the world can be traded at all times of the day. The forex market is very liquid, ... Read Answer >>
Related Articles
  1. Investing

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  2. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Every currency has specific features that affect its underlying value and price movements in the forex market.
  3. Investing

    Currency Positions You Can Take Now

    The foreign currency market is the largest financial market in the world, and investors in this market have many options.
  4. Trading

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  5. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  6. Trading

    How Equities Affect The FX Market

    We look at how you can predict a currency movement by studying the stock market.
RELATED TERMS
  1. Forex Spot Rate

    The forex spot rate is the most commonly quoted forex rate in ...
  2. Currency Futures

    A transferable futures contract that specifies the price at which ...
  3. Spot Trade

    The purchase or sale of a foreign currency or commodity for immediate ...
  4. Spot Exchange Rate

    The rate of a foreign-exchange contract for immediate delivery. ...
  5. Spot Date

    The spot date is the date at which a transaction is settled.
  6. Spot Rate

    The price that is quoted for immediate settlement on a commodity, ...
Hot Definitions
  1. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  2. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  3. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  4. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  5. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  6. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
Trading Center