Difference Between Spot Market and Forward Market
Basis |
Spot Market |
Forward Market |
---|---|---|
Purpose |
Ideal for immediate needs or taking advantage of current market conditions. |
It is used to manage risk by locking in a price for a future purchase or sale. This is helpful for businesses that need to ensure a set price for materials they’ll use later. |
Liquidity |
Generally more liquid, with a higher volume of trades happening constantly. |
Can be less liquid, especially for contracts with specific delivery dates or less common assets. |
Delivery Time |
Transactions are settled immediately, typically within two business days. This is like buying a stock and receiving the shares right away. |
Contracts are agreements to buy or sell an asset at a predetermined price on a future date. It’s like agreeing to purchase a set amount of oil in 3 months at a specific price. |
Handles |
It handles current transactions. | It handles transactions meant for future delivery. |
Price Determination |
Prices are determined by current supply and demand forces in the market. This means the price can fluctuate throughout the day. |
Prices (forward rates) are negotiated between two parties based on expectations of future spot prices and may include a premium or discount. |
Rate of Transaction |
The rate at which current transactions take place is called Spot Rate. | The rate at which forward transactions take place is called the Forward Exchange Rate. |
Hedging |
It does not allow Hedging. | It allows Hedging. |
Foreign Exchange Market : Meaning, Functions and Types
Every nation has a unique currency that it uses for commerce and business, in India, it’s Indian Rupee, but what about the global market? The lack of flexibility of the currencies makes them a barrier to international trade. The Foreign Exchange Market was formed to solve this problem. This is a specific kind of market where the currency exchange rates are fixed. In the absence of a foreign exchange market, the global economy would suffer greatly. The Foreign Exchange Market is the market in which the national currencies are traded for one another.
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