Published on July 9th, 2019 | by neil0
What Do You Need To Know About How Forex Deals Work?
The Foreign Exchange (or Forex) is the most liquid market in the world with an average transactions volume that exceeds $5 trillion. Market participants in this market range from investment firms, commercial banks, retail clients and many others.
Even though we think we know everything about Forex, in fact, most of us, retail forex traders, are actually involved in the FX spot market most of the time. There are other sections of it and that’s the main topic of the current article.
The FX spot market is where most of the retail traders transact on a day-to-day basis. A spot foreign exchange rate is the rate of a foreign exchange contract for immediate delivery. This market is used for immediate requirements and involves the simultaneous buying of one currency and selling of another and an agreed rate and principal amount.
Settlement takes place after two days since the trade date when a physical transfer of the principal amount takes place between both parties involved in the transaction.
Unlike an FX spot transaction, a forward deal is a contract to sell or purchase an amount of foreign currency at a specific price for settlement and at a predefined future date (which is called a closed forward deal) or within a range of dates in the future ( which is known as an open forward). This type of forward deals are available on easymarkets.com and other popular brokerage companies and they represent instruments which help traders to profit in the currency markets.
NDF (Non Deliverable Forward)
This particular market exists for countries where there’s still an ongoing economic development and where the local currency can’t be freely converted. The cost of an NDF contract is represented by the interest rate differential between the two currencies involved in the transaction.
An NFD contract is traded for a fixed amount of the non-convertible currency on a specific date and at a previously-agreed forward rate. Retail traders are not involved in this particular market, but its worth to know that it exists.
In summary, both the spot and forward markets help traders manage risk. The forward market locks in exchange rates for a particular future period, enabling retail traders or institutions to avoid the risk of currency fluctuations. The depth of the foreign exchange goes well beyond what retail traders are trading on a daily basis.