Trading Currency Futures And The Forex Spot Market
Trading currency futures can be an exciting and lucrative investment activity. However, one should understand the subtle differences between trading currency futures and the forex spot market before trying to engage in this financial exchange. The essential difference lies in the timing involved in trading futures.
In a typical spot market investment, stocks, commodities and other goods are traded at an agreed upon price immediately after bargaining is finished. This is what most people imagine when they think of Wall Street, fast-paced negotiations over stock prices followed by quick sales. In futures’ markets, these situations are altered by the use of futures’ contracts. These contracts bind the two traders involved and force them to buy or sell the stocks or other goods in question at a future date for a certain price. Obviously, everyone involved is betting on a particular change to occur in the value of that stock or other good between the time of the contract’s initiation and its end.
Trading Currency Futures and the Foreign Exchange Spot Markets
Trading currency futures involves a similar contract, but in regards to the value of a particular pair of currencies. Each member of the pair has a specific currency that he or she would like to exchange. People engage in the foreign exchange spot market whenever they go to a bank or some other financial institution and exchange their money for some foreign currency. Trading currency futures brings together two currency holders who agree on an exchange price but do not immediately enact the exchange.
These futures are used to defend one’s self against fluctuations in the value of a currency. If someone is going to receive a lot of a particular currency in the future but is concerned about the currency’s value at that point in the future, he or she may try to sell a futures contract on that amount of currency to lock in a certain exchange rate in some other more stable currency. This prevents a trader from suffering loss just because the currency in which he or she is going to be paid loses value.
Trading currency futures is also a form of speculation in which a trader can profit from the rise and fall of currency exchange rates. As with other investments, if someone sells futures at a higher price than they bought them, they keep the profit. Outside the timing requirement, trading currency futures is not that much different from trading any other investment found on the market.
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