The Spot Market is also known as the “cash market”. This is because currencies or assets are traded immediately, “on the spot”, at current market prices.
Futures & Forwards
Futures are financial contracts that allow buyers and sellers to agree upon a price for an asset to be exchanged at a predetermined future date.
Forwards are private agreements where a buyer and a seller settle on a price for a given asset but defer delivery until an agreed-upon date.
Though Futures and Forwards appear to be similar, they differ in several key points:
- As opposed to Forwards, Futures are traded over an exchange and are therefore standardised and more rigid.
- Futures are marked-to-market daily. Thus, the differences in value from the time the contract is entered into are settled on a daily basis between the buyer and the seller. Forwards, on the other hand, are settled at the very end of the contract.
- Futures contracts are mostly used by speculators and are normally closed-out before they reach maturity. Conversely, Forwards are used by sellers such as farmers, who want to hedge against price instability. As a result, the commodity being traded is usually exchanged at the contract’s maturity.
Options are financial instruments that secure the right, but not the obligation, to buy or sell a given asset at a certain price on the predetermined expiration date of the option.
Contracts for Difference (CFDs)
Contracts for Difference, or CFDs, are derivative instruments that allow traders to speculate on the changing values of a given asset without taking ownership of that asset. Trading CFDs in the FX market allows investors to speculate on currency movements.