The Various Sections of the Forex Market
The Various Sections of the Forex Market.
There are several different groupings in the forex market.
#1 Spot Market.
This is the market that most day traders use.The spot market also known as the cash market is the actual price quoted at that moment in time. This was more important when everyone did not have access to live charts. Previously a trader had to contact his broker or bank and ask for a price and nominate the currency he wanted to trade. He would then be given a "Spot Price" and if he wanted to go ahead with the trade he would enter a spot contract. In other words he would agree with the quote and make a trade.
Years ago the contract would take 2 days, something most of us cannot imagine as we are used to instant trading using the automated trading desks. Now we can look at a screen, make a decision, push the button and we are live trading.
# 2 Forward trading.
This is different to spot trading as the parties are trying to agree to the price of the currencies in the future, this is obviously not easy. The time frame for these deals (known as Forward Outright deals) is normally under 6 months.
The main issue here is the interest rates. What I mean by this is that you have to consider the interest differential between the two currencies. Each country has its own interest rate and often these are different , if you are trading EUR:GBP the European interest rate might be 5% and the English rate 3% ( these figures are for illustrative purposes only, especially over this period as interest rate changes are happening frequently) the difference in this example is 2%.
Because of the interest rates the forward rates offered are usually higher or discounted, dependant on which of the pairing you are buying.
Example.
Cash price(spot price) X Interest differential(English interest rate – Euro interest rate) x days/360
Divided by 1+ Euro rate x days/360
If the currency is earning high interest that is taken into the price.
#3 Currency Futures
These are another forward contract. They will have a specific maturity date and contract size. They are also traded on a formal exchange. Because they are traded through an exchange they have additional costs. Those with a lower capital can trade currency futures. Because there is high volatility it is good for the traders as they need the market to be moving.
#4 Currency Options.
Currency options are often used by large importers as well as speculators. If you purchase an option you have the right to sell or buy at an agreed price on a specific date. The advantage is you have the right, but you are not obliged to. If the price goes against you, the good part is you can still use the cash price.
Naturally the purchaser of an option must pay a premium to the other party, the writer of the option, normally his bank or sometimes his broker.
There are several different groupings in the forex market.
#1 Spot Market.
This is the market that most day traders use.The spot market also known as the cash market is the actual price quoted at that moment in time. This was more important when everyone did not have access to live charts. Previously a trader had to contact his broker or bank and ask for a price and nominate the currency he wanted to trade. He would then be given a "Spot Price" and if he wanted to go ahead with the trade he would enter a spot contract. In other words he would agree with the quote and make a trade.
Years ago the contract would take 2 days, something most of us cannot imagine as we are used to instant trading using the automated trading desks. Now we can look at a screen, make a decision, push the button and we are live trading.
# 2 Forward trading.
This is different to spot trading as the parties are trying to agree to the price of the currencies in the future, this is obviously not easy. The time frame for these deals (known as Forward Outright deals) is normally under 6 months.
The main issue here is the interest rates. What I mean by this is that you have to consider the interest differential between the two currencies. Each country has its own interest rate and often these are different , if you are trading EUR:GBP the European interest rate might be 5% and the English rate 3% ( these figures are for illustrative purposes only, especially over this period as interest rate changes are happening frequently) the difference in this example is 2%.
Because of the interest rates the forward rates offered are usually higher or discounted, dependant on which of the pairing you are buying.
Example.
Cash price(spot price) X Interest differential(English interest rate – Euro interest rate) x days/360
Divided by 1+ Euro rate x days/360
If the currency is earning high interest that is taken into the price.
#3 Currency Futures
These are another forward contract. They will have a specific maturity date and contract size. They are also traded on a formal exchange. Because they are traded through an exchange they have additional costs. Those with a lower capital can trade currency futures. Because there is high volatility it is good for the traders as they need the market to be moving.
#4 Currency Options.
Currency options are often used by large importers as well as speculators. If you purchase an option you have the right to sell or buy at an agreed price on a specific date. The advantage is you have the right, but you are not obliged to. If the price goes against you, the good part is you can still use the cash price.
Naturally the purchaser of an option must pay a premium to the other party, the writer of the option, normally his bank or sometimes his broker.
Source...