Friday, January 2, 2015

What is the difference between trading currency futures and spot FX?

Posted by Adi Cahyo at 2:11 AM
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The foreign exchange market is a giant market with lots of different features, advantages and pitfalls. Foreign exchange investors may engage in money futures as well as trade in the spot foreign exchange market. The difference between these investment options is subtle, but worth noting.

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

The main difference between money futures and spot FX is when the trading cost is determined and when the physical exchange of the money pair takes place. With money futures, the cost is determined when the contract is signed and the money pair is exchanged on the delivery date, which is usually some time in the distant future. In the spot FX, the cost is also determined at the point of trade, but the physical exchange of the money pair takes place right at the point of trade or within a short time period 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.

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 anyone goes to a bank to exchange currencies, that person is participating in the foreign exchange spot market.

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

Foreign exchange market manipulators under regulatory scanner
 NEW DELHI: As rupee continues to trade near 60 level against the US dollar, definite brokers and traders have come under regulatory scanner for feasible manipulation in the foreign exchange spot and derivative markets.

Sebi is looking in to feasible manipulations in money derivatives, which are forward value contracts for pairs of currencies including rupee and dollar, sources said.

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