Differences between the Operation of Currency Forward Market and Futures Market
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Differences between the Operation of Currency Forward Market and Futures Market
The purchasing market has complexities than the obvious, and with cross-border trading, some prior dealing has to take effect for the actual trade. Buying in one’s country would require the currency of that country, and having the money grants the purchasing power (Eun & Resnick, 2015). If a person wishes to purchase goods and trade in another country, that person has first to acquire the currency of that other country to attain the purchasing power of that other country. This is the principle of the foreign exchange markets, the largest financial market in the world.
The forward market structure of the foreign exchange market involves contracting for future trade in foreign currencies. It requires quotations for the maturity of the large foreign currencies ranging for varied periods (Eun & Resnick, 2015). The increase in maturity can consequently increase the premium, and this is attributable to the depreciation of the base currency. Conducting the trading is for a longer or a shorter future, and an individual can contract a bank to effect the transaction (Eun & Resnick, 2015). Majorly, some countries do not avail forward exchange for their currencies. This type of exchange can be used where an individual wants to obtain the purchasing power of another state for a future transaction.
The currency features market is a structure where the foreign exchange is traded on an organized exchange other than contracted over the counter (Eun & Resnick, 2015). A client desiring a position in future contract (just as in forward market) in futures market contracts a broker who negotiates with the traders on the exchange floor. The agreement is reached on a specific amount other than the fixation amount within a fixed non-extended date of maturity. In this case, the contract holder, at a minimal set percentage as a surety of fulfilling obligations, deposits a contract bond. The investors who would like to make best from the foreign exchange fluctuations before the actual maturity of the contract can use the market structure.