What's the difference between the futures market and spot market in Foreign Exchange trading?

“The futures market and spot market are two primary components of the foreign exchange (Forex) market, each with its own distinct characteristics. Here’s an overview of the differences between these two markets:

Spot Market:

Immediate Transaction: In the spot market, currencies are bought and sold for immediate delivery. When a trade is executed, the exchange of currencies occurs “on the spot” or within a short period, usually within two business days.
Current Exchange Rates: The spot market reflects the current exchange rates prevailing in the market at the time of the trade.
Physical Delivery: In the spot market, actual delivery of the underlying currencies takes place.
Cash Settlement: Settlement in the spot market involves the actual exchange of currencies and the transfer of funds between the parties involved.
Futures Market:

Future Delivery: The futures market involves contracts to buy or sell currencies at a predetermined price on a future date. The delivery of the currencies occurs at a specified date in the future.
Fixed Contract Size: Futures contracts have standardized sizes, such as standard lots, mini-lots, or micro-lots, which determine the amount of currency being traded.
Speculation and Hedging: Futures contracts are used for both speculative purposes and hedging against potential currency fluctuations.
Margin Trading: Futures trading typically involves margin requirements, where traders are required to deposit a percentage of the contract value as collateral.
Centralized Exchange: Futures contracts are traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME), where buyers and sellers interact through a centralized platform.

In summary, the spot market involves the immediate exchange of currencies at the prevailing rates, while the futures market allows for the trading of currency contracts for future delivery. The spot market is more focused on current transactions, while the futures market caters to future price speculation and risk management.”

Sourced from Chat GPT. Assessed by Sean Lee.