Forward contracts are often used to hedge a company’s currency position they can help to insulate the company from the effect of fluctuations in exchange rates. 2Ī forward contract is an agreement that locks in a rate for the exchange of two currencies at a specific time in the future.
A spot contract is a contract for an immediate forex trade at the spot rate however, the delivery of the purchased currencies to the buyer and seller can take up to two days. Most forex trading is based on the spot rate, which is the current exchange rate between two currencies, such as pounds sterling and Australian dollars. There are some basic forex trading tools everyone should be familiar with when executing currency trades: spot contracts, forward contracts and futures contracts. When there are discrepancies in pricing, the opportunity for triangular arbitrage arises for traders who can execute forex trades in milliseconds there are profits to be made.
Timely and accurate pricing quotes are paramount in executing profitable forex trades. Making the forex trading market even more complex is the fact that, unlike other securities markets, it is truly a 24-hour market. With the exponential growth in forex trading volume came a corresponding increase in liquidity and volatility, as well as a dramatic increase in trading and pricing speed. Following the move away from gold as a pricing standard, the forex trading market blossomed. 1 Once this international standard was removed, each currency’s value was able to shift or “float” relative to the currencies of other countries. The modern fluctuating exchange rate system emerged in the early 1970s, when the majority of countries ceased linking their currencies to the value of gold. Forex trading is the “other side of the coin” of all global trade no goods or services move from one country to another without a corresponding foreign currency transaction. If, hypothetically, all trading in equities, fixed income, derivatives and commodities were to suddenly cease, currency trading would still continue, as businesses in different countries would still have to pay each other for goods and services. Arguably the largest and most important market in the world is the global currency market.