The forex market is a very large market with many different features, advantages and pitfalls. Forex investors may engage in currency futures as well as trade in the spot forex market. The difference between these two investment options is very subtle, but worth noting.

The Difference Between Currency Futures and the Forex Market

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

With the spot FX, the underlying currencies are physically exchanged following the settlement date.

Learn About Forex Trading and Currency Trading

In general, any spot market involves the actual exchange of the underlying asset; this is most common in commodities markets. For example, whenever someone goes to a bank to exchange currencies, that person is participating in the forex spot market.

The main difference between currency futures and spot FX is when the trading price is determined and when the physical exchange of the currency pair takes place.

With currency futures, the price is determined when the contract is signed and the currency pair is exchanged on the delivery date , which is usually some time in the distant future.

In the spot FX, the price is also determined at the point of trade, but the physical exchange of the currency pair takes place right at the point of trade or within a short period of time 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.

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

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.

What is the difference between trading currency futures and spot FX? By Matt Lee Share. Understand the difference between a spot rate and forward rate.

Learn why someone would enter into a contract with a spot How someone makes money in forex is a speculative risk: When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted The forex market is the largest market in the world.

According to the Triennial Central Bank Survey conducted by the Bank In the forex FX market, rollover is the process of extending the settlement date of an open position.

The spot, futures and option currency markets can be traded together for maximum downside protection and profit. The forex market is not the only way for investors and traders to participate in foreign exchange. The spot rate is the immediate purchase price posted on exchanges for purchasing commodities, currency and securities.

Learn how these futures are used for hedging and speculating, and how they are different from traditional futures. Examining open interest on currency futures can help you confirm the strength of a trend in forex market sentiment.

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

The forex market has a lot of unique attributes that may come as a surprise for new traders. With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected.

Here are the top 5 forex risks to avoid. A transferable futures contract that specifies the price at which The purchase or sale of a foreign currency or commodity for immediate An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers. Get Free Newsletters Newsletters. All Rights Reserved Terms Of Use Privacy Policy.