Forex or Foreign Exchange describes the exchange of foreign currencies that are used majorly across the world. It is one of the largest markets in the world, as its boundaries extend over several continents. Another main aspect that attracts the attention of investors globally, to the Forex market, is that the transactions are carried out Over-The-Counter or OTC, in an electronic medium. As a result, there is no central trading establishment in Forex; however, the trade is carried by using the internet, which connects the markets, brokers, and traders. The dynamic nature of Forex is also quite interesting with the price of currencies recording fluctuations and variations.
There are different types of markets in Forex, which allow traders, financial institutions, and companies to trade. Spot market is that which is usually indicated when traders make reference to Forex.
It is the market where traders can purchase and sell currencies according to their present price, which are determined after analyzing various factors such as economic trends, domestic and international events, and interest rates. Spot deals refer to the finalized deals, which are two sided, with one side providing a pre-determined currency to the other party, for a particular amount of currency with reference to a pre-defined rate of exchange.
The forwards and futures market in Forex are different from the spot market, as currencies are not involved in the transactions. They make use of contracts as a means to lay claim on a specific category of currency, a defined value per unit of currency, and an upcoming date for agreement. Futures contracts and Forwards markets also vary slightly in the trade operation.
The latter describes the purchase and sale of contracts as OTC, and the two sides come to terms relating to the conditions of the settlements. In the futures market, a pre-defined size and agreement date is required for the purchase and sale of the contracts. Such contracts also include important details, which are significant to the contract.
Such contracts are employed by large corporations and companies as a hedging tool, since such markets, futures and forwards can prove as effective risk management strategies, in Forex. They are strict and require to be settled in cash during the time of expiry.