Institutions, companies and individuals trade in the ex capital market in three ways: spot market, forward market and futures market.
Capital market transactions
Swap activity in the spot market is not always the biggest because it is the “underlying” physical asset on which forward and futures markets are based.In the past, the futures market was the most popular game for traders because it was always open to individual investors for a long time.But with the advent of automatic trading in the exchange capital market, the spot market has seen a sharp increase in trading activity and has become the preferred market for individual investors, far surpassing the futures market.These figures, when people refer to the ex market, usually refer to the spot market.Forwards and futures markets tend to be more popular with companies that need to hedge foreign exchange risk at a specific date in the future.
Characteristics of the spot market
More specifically, the spot market is the market in which currencies are bought and sold at current prices.This price is the result of supply and demand.Current prices are determined by a number of factors, such as existing interest rates, economic performance, reactions to current political conditions (both local and international), and projections of the future performance of one currency against another.The final deal is known as a “spot deal”.This is a bilateral transaction in which one party delivers an agreed amount of currency to the other and receives a specific amount of the other currency at the agreed exchange rate value.After closing the position, the two sides exchange cash.While the spot market is generally considered the market where transactions are processed today, it typically closes within two business days.Spot market transactions are the most dynamic part of capital markets.
What is the forward and futures market?
There is one major difference between the forward market and the futures market.Unlike spot markets, forwards and futures markets do not trade real currencies.
In the forward market, contracts are bought and sold over the counter.In these contracts, the parties specify terms for the execution of the agreement.
Futures markets are the more stable part of ex’s capital markets, where contracts are traded based on the standard size and settlement dates of public commodity markets such as the Chicago mercantile exchange.The U.S. futures market is regulated by the national futures association.
Both contracts are binding in capital markets and are mostly settled in cash.Forward and futures markets provide protection against risk when trading currencies.