Question

What is the difference between the Spot Exchange Market and the Forward Exchange Market?

Who are the participants in the Forward Exchange Market and for what reason/purpose does each of these parties engage in the Forward Exchange Market?

Answer 1

It is called the spot market or current market if the activity is of a regular nature. It only handles foreign exchange spot transactions or current transactions. At this point in time, payments are conducted at the prevailing exchange rate and the supply of foreign exchange is immediately affected. The exchange rate on the foreign exchange spot market is called the spot rate. Alternatively expressed, the spot exchange rate refers to the rate available on the spot for foreign currency. Forward Market is known as a market in which foreign exchange is purchased and sold for future delivery. It deals with transactions (selling and buying foreign currency) that are contracted today but sometimes implemented in the future. The exchange rate prevailing in a forward contract for foreign exchange buying or selling is called the forward price. Forward rate is therefore the rate at which a future foreign currency contract will be concluded.

Minimizing the risk of loss due to adverse exchange rate changes (i.e. hedging) and making a profit (i.e., speculation). Two quotes on the exchange rate: there are two quotes on the foreign exchange market, namely the purchase rate and the selling rate. If someone goes to the exchange market to buy foreign currency, say, U.S. dollars, they have to pay a higher rate than when they go to sell dollars. In other words, a purchase price for an individual is higher than the rate of selling.

A forward exchange contract is a foreign currency trade of a particular type. Two parties agree to exchange two designated currencies at a specific time in the future. These contracts always take place on a date after the settlement date of the spot contract and are used to protect the purchaser from currency price fluctuations.

Forward contracts are not exchanged on exchanges, and in these deals regular currency quantities are not traded. They can not be cancelled except by mutual agreement between the two parties. The contracting parties are generally interested in hedging and taking a trading risk on a foreign exchange rate. The exchange rate of the contract will be set and determined in the future for a specific date and will help the parties involved to better prepare for future financial ventures and to know in advance exactly what their profits or transaction costs will be at the agreed future date.