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Chapter 1, Part V. And what is beyond spot FOREX? Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    FORWARD/FUTURES CONTRACTS

    Commander in Pips: Now let’s shift to forward/futures trading. In general, forward/future contract assumes making a deal to buy or sell particular currency at specified exchange rate (i.e. price) on a future date (that’s why they call futures/forward!). Conditions are fixed in contract directly. For example, if the current EUR/USD rate is 1.38 and today is April 20th. Currently I would like to buy EUR for USD (assume that you would like to sell it) in on June 20th for 1.33. So, today we’ve come to agreement (i.e. made a deal) with a future date of execution and a future price. If today we will sign a corresponding contract on paper, then this will be a forward contract on EUR/USD.

    Pipruit: If I understand correctly, a forward contract is an agreement to make a deal at specified price and date in the future, but the particular date and price are agreed on today?​

    Commander in Pips: That’s right.

    Pipruit: And why there are two words that are specified that. What is the difference between a forward contract and a futures contract?​

    Commander in Pips: Good question son. The nature of forwards and futures is the same. There is only a difference that futures contracts are traded via different exchanges. Futures is an organized market and forwards are not. A forward is a contract that trades on an over-the-counter market. This specification leads to some different qualities. First of all, futures contracts have strict specifications by exchange – dates of expiration, value of contracts, delivery dates and other specifications are fixed and well known ahead of time. And the Exchange itself is counterparty for both parties. For the seller and the buyer on their trade, the exchange is the intermediary. On the over-the counter market there is no such tight specification for contract conditions. In fact, you may apply any conditions of your choice if those conditions are acceptable for both parties of the deal – buyer and seller. And you can choose the counterparty for your trade by yourself.
     
    #1 Sive Morten, Dec 14, 2013
    Lasted edited by : Feb 3, 2016
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