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. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. In the forex market, how is the closing price of a currency pair determined?

    The foreign exchange market, or forex, is the market in which the currencies of the world are traded by governments, banks, ... Read Answer >>
  5. How is spread calculated when trading in the forex market?

    First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms ... Read Answer >>
Related Articles
  1. Trading

    Combining Forex Spot And Futures Transactions

    The spot, futures and option currency markets can be traded together for maximum downside protection and profit.
  2. Investing

    Introduction To Currency Futures

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

    Forex: Gauging Forex Market Sentiment With Open Interest

    Examining open interest on currency futures can help you confirm the strength of a trend in forex market sentiment.
  4. Trading

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  5. Trading

    Top 5 Forex Risks Traders Should Consider

    With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
  6. Trading

    Top 6 Questions About Currency Trading

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  7. Trading

    Understanding the Spot Market

    A spot market is a market where a commodity or security is bought or sold and then delivered immediately.
RELATED TERMS
  1. Forex - FX

    The market in which currencies are traded. The forex market is ...
  2. Foreign Exchange

    The exchange of one currency for another, or the conversion of ...
  3. Forex Hedge

    A forex hedge is a foreign currency trade that's sole purpose ...
  4. Spot Exchange Rate

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

    The price that is quoted for immediate settlement on a commodity, ...
  6. Forex Option & Currency Trading Options

    A security that allows currency traders to realize gains without ...
Hot Definitions
  1. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  3. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  4. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  5. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  6. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
Trading Center