How does the forex market work
As stated in the text above, the currency marketplace is not centralized, and for that, currencies can be traded anywhere and at any given time. It’s also important to note that currencies are traded worldwide in major financial centers such as Paris, London, Tokyo, New York, Singapore, among others. Financial markets within these centers are extremely active as the price quotes are constantly changing due to volatility.
Normally, currency trading involves the buying of one currency and, at the same time, selling another. What happens in the forex market is that buyers and sellers actively speculate on the direction to which currencies are likely to take in the future. Again, the forex market occurs basically in three types that is; spot market , future, and forward markets.
The spot market, which also referred to as the cash market, is a type of currency market where currencies are bought and sold for immediate delivery or within a couple of says depending on the local regulations. Again, the price quoted for the buying and selling in the spot market is referred to as the spot price. Also, buying and selling is strictly doe in cash at the current price set by the market. It’s also important to note that spot markets can occur as organized markets. As an exchange or even over-the-counter and whether there is an infrastructure in place where the transactions are conducted, the spot market will still operate.
Forward forex market, on the other hand, is an over-the-counter marketplace where prices of financial instruments are set today for future delivery. Usually, the purpose of the forward forex market is to create contracts to be delivered at a specific future date. Importantly, forward contracts can be customized to fit a customer’s preferences as they also have a characteristic of maturity. Again, prices within the forward forex market are interest-rate based, which is derived from a differential interest rate between two currencies.
Lastly, we have a future forex market which is associated with contracts agreed upon to buy or even sell a given currency at a set or rather agreed price and time in the future, and unlike forward contracts, futures contracts are legally binding. Futures contracts also have a maturity date or rather a termination date to which the delivery of a given currency must occur and not beyond.