Kinds of Foreign Exchange Market

The foreign exchange currency markets allow buying and selling of various currencies all over the world. Business houses and banks can purchase currency in another country in order to do business in that particular company. The forex market also known as FX market has a worldwide presence and a network of different currency traders who work around the clock to complete these forex transactions, and their work drives the exchange rate for currencies around the world. Since the foreign exchange currency market is one of the biggest markets of the world, the market is sub divided into different kinds of foreign exchange market. There are different features and characteristics associated with the different foreign exchange markets have different trading characteristics. The main three types of foreign exchange markets- the spot foreign exchange market, the forward foreign exchange market and the future foreign exchange market are discussed below. You’ll get detailed information regarding different forex currency markets types below:

Spot Market

The spot kinds of foreign exchange market are those in which the commodity is bought or sold for an immediate delivery or delivery in the very near future. The trades in the spot markets are settled on the spot. The spot foreign currency market is among the most popular foreign currency instrument around the globe, contributing about 37 percent of the total activity happening in all other types of foreign exchange markets. Spot forex currency markets types are opposite to other kinds of foreign exchange market such as the future market, in which there is a set date is mentioned.

The perfect example of most common kinds of trades of spot foreign exchange market is forex contracts. If these contracts are not settled immediately, the forex traders would expect to be compensated for the time value of their money for the duration of the delivery. The important point to note is that these contracts are settled electronically thus making forex markets essentially instantaneous. The spot forex currency markets types are considered to be highly paced markets and volatility and quick profits and losses are its important features.

A spot deal in foreign exchange market comprises of a bilateral contract between two parties in which a party transfers a set amount of a particular given currency against the receipt of a specified amount of another currency from the counterparty, based on an agreed exchange rate, within two business days of the date when the deal gets finalized. However, there is an exception in case of Canadian dollar. In Canadian dollar, the Spot delivery happens the very next business day. The name spot does not mean that the currency exchange happens the same business day on which the deal is executed. Forex currency transactions which require delivery on the same day are called as cash transactions. It is interesting to know that the two day spot delivery has been in place since long before there were any technological breakthroughs in information processing facilitating the instantaneous transactions. This time period was required to check all the transactions details among the participating companies. Despite the technological breakthrough in forex trading markets, the contemporary markets don’t find it necessary to reduce the time to make payments. Because human errors still happen and time is required to fix the errors, if any before the delivery. In case of wrong deliveries happen in a spot deal in foreign exchange market, the fine is imposed.

The most traded currency in spot types of foreign exchange markets in terms of volume is US dollar. The reason being is that U.S. dollar is the currency of reference. The other major most common currencies traded in spot markets are the euro, followed by the Japanese yen, the British pound, and the Swiss franc.

Forward Market

The forward Forex currency markets types comprise of two currency trading instruments- forward outright deals and swaps. The swap currency deal is different from the other kind of forex instruments in a way that it consists of two deals, while all other transactions consist of single deals. A swap is a combination of a spot deal and a forward outright deal. Generally, forward foreign exchange market deals in cash transactions only. This is the reason why the transactions of the forward types of foreign exchange markets are separately analyzed. Based on the data shared by the Bank for International Settlements, the percentage share of the forward kinds of foreign exchange market was 57% in the year 1998. The forward markets have no set terms with regard to the settlement dates and this range from 3 days to 3 years. The volume in currency swaps longer than one year tends to be light but, technically, there is no impediment to making these deals. Any date past the spot date and within the above range may be a forward settlement, provided that it is a valid business day for both currencies.

The nature of forward types of foreign exchange markets is decentralized, with participants from all over the world entering into a different types of forex deals either on a one on one basis or through forex brokers. In contrast to this, the currency futures Foreign exchange market is a centralized one and where all the deals are executed on trading floors provided by different exchanges. Whereas in the futures market only a small number of foreign currencies are traded in multiples of standardized amounts. The forward types of foreign exchange markets are open to any currencies in any amount.

Futures Market

Future Forex currency markets types are specific types constitute the forward outright deals which in general take up small part of the foreign exchange currency trading market. Since future contracts are derivatives of spot price, they are also known as derivative instruments. They are specific with regard to the expiration date and the size of the trade amount. In general, the forward outright deals which get mature past the spot delivery date will mature on any valid date in the two countries whose currencies are being traded, standardized amounts of foreign currency futures mature only on the third Wednesday of March, June, September, and December.

Future kinds of foreign exchange markets have many features, which attracts traders to future markets. The first thing is that any one can trade in future market. It is open to all kind of traders in foreign exchange market including individual traders. This is the difference between the future foreign exchange market and the spot foreign exchange market, since spot market is closed to individuals traders except in case there are deals of high net worth. The future forex currency market types are central markets, just as efficient as the cash market, and whereas the cash market is a much decentralized market, futures trading take place under one roof. The futures market provides various benefits for currency traders because futures are special types of forward outright contracts which corporate firms can use for hedging purposes.

Although the futures and spot markets trade closely together, certain differences between the two occur, thus giving away the arbitraging opportunities. Gaps, volume, and open interest are important technical analysis tools solely available in the futures markets. Because of these benefits, currency futures trading regularly attract a large number of forex traders into this market. The traders who are outside the exchange can have the idea about the prices from on-line monitors. The most common pages regarding future markets are available with Reuters, Bridge, Telerate, and Bloomberg. The rates are presented on composite pages by the Telerate, while the currency futures are represented on individual pages showing the convergence between the futures and spot prices by Reuters and Bloomberg.