The trading in forex is done in three differnet ways viz. the Spot market, the Forwards market and the Futures market.
1.Spot Market
In the spot market currencies are bought and sold according to the current price.
It is a bilateral transaction by which one party delivers the agreed amount of the agreed currency to the counter party and receives the specified amount of another currency at the agreed exchange rate value. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), the trades actually take two days for settlement.
2.Forwards and Futures Markets
Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency at an agreed price per unit on a future date for settlement.
Futures contracts are bought and sold based upon a standard size and settlement date, where as Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized.
Both Forward and Futures contracts are binding and are typically settled for cash for the exchange in question upon expiry. The contracts can also be bought and sold before they expire. The forwards and futures markets offer protection against risk when trading currencies. Usually, big financial institutions and banks use these markets to hedge against future exchange rate fluctuations. Speculators also take part in these markets.
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