Forex Recipe

There are different types of transactions in the forex market like spot transactions, forward transaction, futures, options, and Swap. The spot foreign exchange is the largest with over two trillion U.S. dollars traded per day. Forex futures market, which is a derivative of the spot market, is 1/100th in the size.
 
In forex futures, a contract is purchased to buy or sell a particular amount of an asset at a specific price on a predetermined date. As opposed to conventional futures, forex futures are not traded on any centralized exchange and the deal flows through several different exchanges in the U.S. and abroad. The majority of the forex futures are traded through the Chicago Mercantile Exchange and its partners. All currency futures quotes are always made against the U.S. dollar unlike the spot forex market.

For any futures contract, your broker will provide you with the specifications, like the size of the contract, pricing limits, time increments, trading hours, etc. A typical specification sheet will mention the type of forex derivatives, either hedging or speculating, to be used. In hedging, the hedger will use forex futures to eliminate risk by protecting themselves against any future price movements. The speculators, however, prefer taking risk to make a profit.

There are several advantages of trading in the futures market. They are lower spreads, mostly 2 to 3, lower transaction costs, and more leverage. But, disadvantages are it requires higher capital, transactions are limited to the exchange’s sessions, and may apply National Futures Association fees.

This entry was posted on Sunday, May 11th, 2008 at 3:28 am and is filed under Forex Market. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.