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5 Differences between FX futures and FX Spot

FX Futures FX Spot

When it comes to trading currencies online, there are many different markets that one could trade. With currencies, the obvious choice of course is the FX spot markets. But did you know that you can also trade currencies in the futures market?

In this article, we outline five differences between trading FX futures and FX spot. Although both these markets operate on the foreign exchange or forex markets, the approach is quite different. Also depending on your requirements, you can choose between either of these two.

1. FX Futures are exchange traded

The futures markets are traded at an exchange. This is the biggest difference between the FX spot markets. In the spot markets, you are trading over the counter, also known as OTC. But with futures, you are trading at exchange.

This has certain significant benefits over FX spot. Due to the fact that the futures markets are traded at an exchange, there is a good amount of information such as the trading volumes.

The trading volumes one gets to see in the FX spot markets are hard to validate. At best, the volumes only indicate the total trading volume with your broker or liquidity provider.

2. FX Futures removes the counterparty risk

One of the main drawbacks with trading over the counter derivatives is that there is always a counterparty default risk. This is because, OTC contracts involve the buyer and the seller directly. What this means is that one of the parties (the buyer or the seller) defaults, it puts the other party at risk.

With FX futures, due to the exchange traded concept, there is no counterparty default.

3. FX futures are always priced in USD

Another main difference is that, regardless of which currency you wish to trade, they are always price in the U.S. dollar. For example, in the FX spot market, you can trade the USDJPY.

This means that one USD is priced in Japanese Yen. With the FX futures markets, if you want to trade the same currency (the yen), then you will get the inverse pricing. In other words, you will see the pricing of one Japanese yen, priced in U.S. dollars.

This is applicable for just about every currency. However, you will find similarities with currencies such as EURUSD, GBPUSD, AUDUSD, NZDUSD and so on. This is because these currencies are already priced in U.S. dollars.

4. FX futures roll every quarter

In the FX spot markets, you are able to trade and hold on to your position over weeks or months even. But with the FX Futures markets, this isn’t possible. FX futures markets comes with contracts that rollover or expire every quarter.

Therefore, before the date that the contract is rolled over, you will have to close out your existing position and open a new position in the upcoming contract. While some spot traders may see this as a deterrence, this is how the futures markets work.

5. FX Spot is for speculation while futures are for hedging

Lastly, you might be wondering why traders would like to make use of the futures markets. In the FX spot markets, you can use it for speculation. This means, if you think that the price of a currency pair will go higher, you will be able to take a long position.

This is purely for speculation meaning that you are able to profit from the difference.

In the futures markets, you can use it to hedge the currency exchange rate volatility. FX futures are typically used by large corporates and banks. In doing so, such counterparties are able to hedge the risk of a varying exchange rate, by locking in a price.

Of course, depending on how the contracts expect, the counterparty can either make a profit or a loss.

FX Futures v/s FX Sport - Conclusion

As you can see from the above, the futures and the spot markets are quite different. You can also use the futures markets for speculation as well. Similar to the spot markets, you can also take long or short positions in the futures markets.

The margin requirements are also vary quite a bit when you trade the futures markets. Lastly, both these markets are highly leveraged. This means that there is a significant risk of making big profits or losses.

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