Global
Market Astro has tried to brief its blog readers regarding foreign exchange
markets and
the classifications in it.
Spot Market and the Forwards
and Futures Markets
There are three ways through which the financial institutions, corporations, corporate companies and individuals trade currencies
Ø Spot market
Ø Forwards market
Ø Futures market.
The foreign exchange trading in the spot
market always has been the major market as the forwards and futures markets are
based onthe "underlying" asset. In the olden days, the futures market
was the most common venue for traders since it was available to individual
investors for a longer period of time. Later with the initiation of electronic
trading, the spot market has observed a huge surge in activity and now outshines
the futures market in terms of trading by individual investors and speculators.
When people mention the forex market, they generally refer to the spot market.
The forwards and futures markets tend to be more popular with companies that
need to hedge their foreign exchange risks out to a specific date in the
future.
Spot
market.
The spot market is where buying
and selling of foreign currencies
takes place according to the current price, determined by supply and demand.It is
a reflection of many parameters such as economic performance, current interest rates, sentiment
towards on-going political situations (both internationalization), as well as
the perception of the future performance of one currency against another. The
finalized deal is known as a "spot deal". It is a two-sided
transaction by which one party delivers an agreed-upon currency amount to the
counter party 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 generally known as one that deals with transactions
in the present (rather than the future), these trades actually take two days
for settlement.
Forwards and Futures market.
Forwards and Futures market.
The forwards and futures markets do not trade actual currencies. Instead they deal with contracts that represent claims to a certain currency, a specific price per unit and a future agreed date for settlement.
In the forwards market, contracts are bought and sold Over the Counter (OTC) between two parties. The terms and conditions of the agreement are determined by themselves.
In the futures market, futures contracts are bought and sold based upon a 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 modified. The exchange acts as a counterpart to the trader, providing clearance and settlement.
Both the contracts are binding and are usually settled for cash for the exchange in question upon expiry, although contracts can also be traded before expiration. When trading currencies, the forwards and futures markets offer protection against risk. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.
