Futures trading is an agreement between two parties, a buyer and a seller. And, it is for exchanging the underlying market for a fixed price at a future date. The buyer must buy the underlying market. The seller has to sell at or before the expiry of the agreement.
People often use futures to hedge against expected exchange rate changes. The two primary purposes of forex futures are hedging, which lowers exposure to the risk caused by currency swings, and speculation, which could result in profits. For example, a trader might buy a certain number of EUR/USD forward contracts to lock in an exchange rate. That person will then be obligated to buy those USD when the contract expires – hopefully when the USD’s value has risen, but even if it has dropped.
We offer three ways to trade forex:
Futures (forwards): trade a specific currency pair at a set future date. Your choice of currency pair would depend on which currency you believe will strengthen against the other by the set date.
Spot trading: purchase or sell forex ‘on the spot’. This means the exchange takes place at the same moment the trade is settled. Spot prices reflect the underlying market and have no fixed expiry.
Options: gain the right, but not the obligation, to buy and sell FX on a specific date in the future (called the expiry) at a specific price (called the strike price).
For one thing, exchange laws and regulations do not apply to forex (SPOT FX) transactions. However, forex futures are conducted on recognized exchanges. This is the primary distinction between the two.
With the many contract sizes available, forex futures are a useful tool for novice investors who would rather trade smaller lots. In addition, big investors will use them to take up significant positions as they are liquid.
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