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Forex Basics
Difference between spot and futures in Forex
by InvestorGuide Contributor (Write for us!)
(Click on the links within the article to get definition of that word)
Investing terminology can get confusing, and foreign exchangetransactions don’t make
things any easier. You may often hear the terms “spot” and “future” thrown around effortlessly if you watch investmentnews shows or read articles on the internet, and understanding what the terms really mean will make your life a whole lot easier.
Futuresrates and contracts are a little
different. A futures contract between two parties sets the price now, but the whole transaction doesn’t have to be settled immediately. The two parties can agree to settle at a future date more than a day or two down the line. When the agreed upon time is reached the transaction will be paid for and the commodity, currency or security delivered. Quite often the futures rate is locked in, but delivery occurs three months later. Futures are also traded on central futures exchanges, such as the Chicago Mercantile Exchange (CME). Unlike the market for spot rates, futures usually are traded in set hours, like stocks in the stock market. Although, all night markets do exist in futures, they are largely illiquid, rarely traded and are inaccessible to averagetraders.
The main difference between spots and futures is the actual delivery of currency. In futures, the price is settled when the contract is signed and the currencies are exchanged. In the spot forex, the price is determined at the point of trade, and the physical exchange of
the currencies takes place at that moment or within a short period of time. Although, many futures traders tend to close out their positions before the contract expires.
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