What Is the Difference Between Spot and Forward Currency Rates?
Foreign exchange rates are constantly changing. Terms such as "spot rate" and "forward rate" may be confusing to some people. These two terms refer to two different currency trading methods.
Other People Are Reading
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Currency Market
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The currency market ,or FOREX market, is the largest and most liquid market in the world. The two kinds of traders involved in the currency market are hedgers and speculators.
Spot Rate
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The spot rate is the present value of a currency. This rate is constantly changing due to trading on the currency exchange.
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Forward Rate
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A forward rate is a specific exchange rate at which two parties agree to trade currencies. The parties in question enter into a forward contract that specifies an exchange rate and a future date of exchange.
Forwards and Futures
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Forward contracts and futures contracts are similar but not exactly alike. Forward contracts are specific agreements between two parties, while futures contracts are standardized contracts traded over a regulated futures exchange.
Conclusion
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When people talk about FOREX trading or currency trading, they are referring to buying and selling currencies at the spot rate. Forward contracts are special agreements made between two interested parties to lock in a desired rate of exchange.
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References
- Photo Credit currency image by Joann Cooper from Fotolia.com
