Spot market and currency futures trading are different from each other as in spot market, transactions are done on spot and using telephone and electronic media in forward markets.
After the opening in 1970s of Interaction Monitory Market distribution of the Chicago Mercantile, the currency future trading has gained a lot of popularity.
Before the forex trading on online retail basis was introduced the best way of trading between currencies in small amounts was by using currency futures trading on the Chicago IMM. The percentage share of futures trading is the total forex trading done on daily basis is just 7 percent. However, this amount is still significant which is almost equal to $210 billion.
The Future Contract
The future contract of a currency refers to an agreement done for some defined time in future where one currency would be received and other will be delivered according to the market rate. In simple words, it is a contract for forex forward with fixed time and contract size. The contract size has to be traded following some centralized exchange.
What is the difference between Spot Traders and Currency Futures Trading
Let us see the key differences between the Currency Futures and Spot Trades by following a simple example. If we see the currency pair of British Pound Sterling(GBP) and U.S Dollar(USD)and there are future contracts to be delivered in April, July, October and November. Each of these future contracts of GBP/USD currency pair will involve a 62,500 GDP money transaction.
Moreover, as the exchange place of these future contracts in the US the currency for exchange will be USD. This means that currency pairs like GBP/USD will be quoted the same way as forex spot whereas, currencies like USD/CAD will be inverted.
The Currency Futures Trading
International Monetary Market of the Chicago Mercantile Exchange came into existence in 1972 and it was this organization which initiated the currency futures trading. This form of trading became popular amongst merchandise traders to consider the exchange rate variations of currencies. This concept is easy to understand for such traders as it is somewhat similar to how the farmers sell the crop before it is actually harvested.
This new form of trading allows even the smaller traders to become a part of the forex trading without a need to deposit money in banks first. This solves the problem of chances of getting rejections from banks because of the financial status.
It can be a very confusing situation when you try to understand currency futures trading for the first time. It can be considered as a pack of animals that are gesturing and howling to each other. The whole confusion can be carefully avoided to the best by providing instant trading executions and fair rate to both the local traders as well as off the floor ones.
Differences between the Forex Trading and Currency Futures
There are several other differences between currency futures versus forex trading other than the quotation conventions and the fixed delivery dates.
Another main difference is the leverage. In case of future contracts, leverage ratio is 5:1 i.e. 20 percent of the value. Whereas, for retail forex trading leverage ratio can be 500:1. This is a very high amount. In U.S the minor traders are given maximum leverage ratio of 20:1and major are given %0:1.
Moreover, even though the markets treat currencies pair in same way there can be minor differences in terms of future and cash markets. This results in currency traders to do trading between the markets in both spot and forward markets.
Another big difference is that the contracts are restricted to minimum amounts specified. Consider as an example, the USD/JPY contract is restricted to 12,500,000 Yen and GBP/USD has value of 62,500 pounds.
Thus, the trading transactions are very precise with the précised amounts being harder to carry out. Moreover, the procedure for getting an account can be more difficult that the retail forex account which is much easier.
Unlike spot trading, the future contacts have to do trading in a forward direction for the delivery date. This will require special care in considering and analyzing all aspects of market to make a reasonable estimation for quote of the futures contract.