Any trade requires a market, and the Forex trade also needs one. However the Forex trade is not like other trades because it is based on the currency of countries rather than commodities. Therefore there are specific types of markets developed especially for Forex trading. There are three main types of markets explained below.
Spot markets are, like their name, used for spot trading. Exchange of currency takes place on the spot, and both traders agree on each other’s terms in real time. Even though the exchange of currency takes a certain amount of time for transaction, both the buyer and seller decide to trade together on a “right now” basis. The spot price of the currency pair however, may change drastically. The spot price is the price set when the buyer and seller decide on it. Since millions of transactions are being done every second, the price of the currency on the spot market fluctuates every few seconds. In the forex trade, this rate is called the forex spot rate.
In the forex trade, the forward exchange market is a financial market that conducts trade based on the expected value of a currency in the future. It is determined by a specific rate known as the forward rate. The forward rate is determined by the slide or rise of one currency against another in a currency pair. So, a currency that is sold on the expectation that the value of the currency pair might decline is called selling at a discount; whereas the currency pair that is sold on the expectation that the expected price might increase is considered to be ‘sold at a premium’. Usually, the spot rate of the particular currency pair that is to be sold is taken, and is set to mature. The maturity time is set by the buyer and seller and is usually between a few weeks to a few months, after which the currency pair is sold or bought.
The futures market, as the name suggests, is a market where the exchange is done based on the assumption that the value of the currency might appreciate or depreciate based on the market, and trade on it accordingly. The key difference between forward market and futures market is that in the forward market, the participants (buyer and seller) can negotiate their terms, while in the futures market, the price is not at all negotiable.