Differences in the Forex Markets: Foreign currencies and other markets differ in a number of important ways. Investors are not subject to the same strict rules or standards as in the stock, futures or options markets, as there is less regulation in these markets. This shows that there is no central organization or clearinghouse that oversees the forex market.
Variations of market
existing in foreign exchange market that's are given below:
The
Spot Market: A spot market is where financial
instruments are exchanged for immediate delivery, such as commodities,
currencies, and securities. Delivery, here, means cash exchange for a financial
tool. Spot markets are also referred to as "liquid markets" or "cash
markets" because transactions are instantly and essentially exchanged for
the commodity. While it may take time to legally transfer funds between the
buyer and the seller, such as T+2 on the stock market and in most currency
transactions, all parties agree to trade "right now."
The
Forward Market: A forward market is a marketplace that
offers financial instruments that are priced in advance for future delivery. It
tends to be referenced as the foreign exchange market, but it can also apply to
securities, commodities, and interest rates. A forward trade is one that
settles further in the future than a spot.
The forward price is
the spot rate plus or minus the forward points, which represent the difference
in interest rates between the two currencies. Similar to a spot transaction,
the price is set on the transaction day, but the money is actually exchanged on
the maturity day. For the benefit of the counterparties, a forward contract is
made. They may be for any amount and be paid on any day that is neither a
weekend nor a national holiday.
The Futures Market: A futures market is a market in which traders buy and sell futures contracts. A futures transaction is similar to a forward in that it settles later than a spot deal, but is for standard size and settlement date and is traded on a commodities market. Producers and suppliers of commodities use futures contracts to try to reduce market volatility.
Futures markets are
also called futures exchanges. Traders use futures exchanges to hedge against
price volatility and speculate on the future prices of stock indexes,
currencies, commodities, interest rates and other assets. A futures contract is
a contract to exchange a particular security at a specific price on a specific
future date. Unlike option contracts, futures contract buyers are typically
obligated to execute their contracts and accept delivery of the underlying
asset. Many businesses also use the futures market to lock in future prices of
commodities that they will need for their day-to-day activities, such as fuel
or grain.
There are hundreds of
futures markets across the world. The Chicago Board of Trade, Chicago
Mercantile Exchange, and The New York Mercantile Exchange, for example, are
futures markets.