Easy to operate. A spot transaction allows you to take advantage of the prevailing exchange rate and deliver the funds to a beneficiary of your choice and time.

• Trading Currency Futures vs. Spot FX: The Difference.
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Limit orders and stop losses. Lower capital requirement. Unlike forward and option products, where a deposit is normally required, spot transactions require no extra capital. Disadvantages and Drawbacks of Spot Contracts. High Risk. Using only spot contracts may be a high-risk strategy for a business, because exchange rates can move significantly in a short period of time.

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This risk can eliminate any profit margins and even cause losses that may have been built into the original deal. Therefore a hedging tool such as a forward contract or an option will be preferable. Want to learn more about trade finance? Download our free guides. Download Now.

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Buy Spot FX – Currency Spot Transactions

Tom Next swaps are especially common when forex traders need to move the delivery date of a position held overnight out to the current spot delivery date. Currency futures contracts differ in terms of their delivery date from the aforementioned forward contracts since their delivery dates are typically standardized and occur on a quarterly basis, rather than on a certain number of days from the date of the trade. For example, a futures trader might be able to transact a currency futures contract with a delivery date in March, June, September or December.

Trading Volume. The forex market is the largest financial market in the world, with its primary trading centers based in London, New York and Tokyo, with additional significant trading volume seen in Sydney, Auckland, Hong Kong and Singapore. One significant difference between the forex spot and currency futures markets is that of trading volume. Furthermore, the vast majority of currency transactions take place in the unregulated Over the Counter Interbank forex market where dealing occurs via an extensive phone and electronic network among financial institutions and their clients.

In recent years, the growing availability of online forex brokers has made spot forex trading accessible to the masses. Retail traders who previously would not have been able to participate due to their lower investment amounts can now trade forex on margin in modest amounts using these Internet based brokers. Nevertheless, the volume of these currency transactions traded remains small in comparison to that observed in the Interbank forex market.

What is a spot contract?

Of all currency transactions, less than 10 percent take place on exchanges in the form of currency futures trades. In the Interbank forex market, transaction sizes can be just about any amount, but they are typically more than USD 1 million in order to qualify for consideration to be quoted by most Interbank market makers and dealing desks at major financial institutions.



Some banks and finance companies do provide a forex quotation service in smaller amounts to favored clients that usually trade larger amounts, as well as to middle market clients from smaller corporations or high net worth individuals. Pricing for smaller transaction sizes is generally not as competitive, so dealing spreads may widen for these lesser amounts.

Spot Contracts - What is a spot contract? | Trade Finance Global

Interbank quotations on especially large transactions above USD 50 million may also widen since the market maker may move the market when executing transactions of this size or higher. The wider spread allows them to reduce their risk somewhat after agreeing to execute such a sizeable trade for a client or a fellow professional trader. Just about any major financial institution with a strong foreign exchange department will offer pricing on virtually all major and minor currency pairs and crosses.

Spot and Forward Contracts versus Forex Options

Most will also offer pricing on more exotic currencies quoted against the U. In addition, the minimum tick size for most of the major currency pairs quoted in the Interbank market has recently declined to 0. In the retail forex market, which is typically accessible via online forex brokers, a standard transaction size or lot is , units of the base currency.

Nevertheless, since retail traders often wish to trade forex in smaller amounts, transaction sizes can also be as small as a micro lot or 0. In addition, a mini lot size is also usually available at most brokers, which is 0. Minimum tick sizes are typically the same as in the Interbank forex market. Retail forex traders are generally only able to trade the currency pairs offered by their broker.

If their broker does not offer cross trading in the cross currency pairs they desire directly, they will need to execute two transactions using the U. Dollar pair for each currency to establish the desired cross currency position. An FX swap is two agreements to exchange a pair of currencies with two different value dates, in opposing directions. For example, a swap contract might be created to buy currency on the spot date, and sell the same amount in 1 month.

Commonly one leg of a swap is a spot transaction, in which case the swap is essentially the forward point component of a forward contract. However, it is also possible to execute a swap where both legs are forwards. Tenors refer to the common standard contract durations for forward trades. How can we help you? What are bid and ask? What is liquidity? What is a market maker?