Types of Foreign Exchange Market

The Foreign Exchange Market is the place where foreign currencies are bought and exchanged. The sale and purchase of currencies from various countries is conducted here by buyers and sellers.

Foreign Exchange Market Types

On the basis of the nature of transactions, the foreign currency market is divided into two categories. These are they:

Spot Forex Market:

A spot market is the foreign exchange market sector where currency transactions (sale and purchase) are paid within two days of the transaction. The term “spot transaction” refers to when a seller and buyer complete a monetary transaction within two days.

As a result, a spot market is where foreign exchange is sold and bought on the moment. A Spot Exchange Rate is the rate at which the transaction is completed. It represents the current market exchange rate.

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Forward Forex Market:

The forward exchange market includes the sale and purchase of foreign currency at a future period, usually after 90 days. A Forward Transaction occurs when the buyer and seller agree to sell and acquire foreign currency after 90 days at a fixed exchange rate.

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As a result, the forward market is made up of forward foreign exchange transactions. A Forward Exchange Rate is the rate at which buyers and sellers in the forward market settle their transactions.

Futures Forex Market

In terms of basic function, future markets are comparable to forward markets. Future markets, on the other hand, operate on centralized exchanges. There are no counterparty risks for either party thanks to controlled exchanges. This contributes to the high liquidity of future markets, especially when contrasted to forward markets.

Thus, spot and forward markets are key types of foreign currency markets that frequently aid in the stabilization of foreign exchange rates.

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