Reasons to Trade Foreign Exchange Market

When most people talk or write about Foreign Exchange , they are referring to the spot FX.

However, there are different types of currency investing markets that you should be aware of:

1. The Spot Currency Market

The spot market (also known as cash currency market) is the current or actual price of a currency at that moment in time. It is the price at which you will get a currency for immediate delivery.

Every time you go to a bank to exchange your Japanese yen for Canadian dollars, you are engaging in the spot currency market. For the spot FX trader, it is the price in which you contact your FX broker either by phone or through his trading platform and ask for the price you wish to trade a particular currency.
2. The Forwards Currency Market

A more complicated currency market is the forwards currency market. Forward trading is different from spot trading in that you must take into account the interest rate differences, otherwise called the interest rate differential, between the countries currencies you are trading in.

For example, when dealing with the currency pair GBP/USD (Great Britain Pound against the USA dollar), you must take into account the interest rate differences between Britain and the USA. If the interest rate in Britain is 5% and the interest rate in the USA is 3%, the interest rate differential is 2%.

3. Currency Swaps

A currency swap is a combination of a spot currency trade and a forward contract. This type of contract is also very complicated and involves multinationals trying to get better rates in their trading activities.