The difference between a spot and a forward foreign currency exchange

The modern advancement made a lot of things possible for people. One thing is online currency trading, and another is avoiding risks. This article will elaborate more on the spot and forward foreign exchanges in line with preventing currency fluctuations.

Understanding what a spot foreign exchange is

When we talk about the spot foreign exchange rate, we discuss foreign exchange contract rates with urgency. They are usually delivered in two days. And when we say spot rate, we mean the buyer’s expected price to pay a currency in terms of another currency. These contracts, such as property purchases and deposits, card deposits, and a lot more, need urgency. Traders use a spot contract to assure that the exchange rate will not change on a specific future date. Another option to ensure a future rate is a forward contract.

Understanding what a forward foreign exchange is

On the other hand, a forward foreign exchange or foreign contract is buying or selling a foreign currency amount at a specified price in a close forward or open forward date. When we say close forward, it is a future date decided in advance. Open forward means in a span or within a range of time in the future. Traders use these contracts when they expect the currency rate to rise. As a result, they secure this current rate by forward contracts that bind both the buyer and seller.

Traders greatly benefit from using spot and foreign exchange trading because they lessen the risks of price fluctuations. They reduce the expenses when buying something from foreign countries and decreasing the product from the foreign country’s profit margin. In the case of forward foreign exchange, they can also help secure an exchange rate amidst price fluctuations.

Understanding the difference between a spot and forward foreign rate exchange

If the buyer must make payments urgently in a transaction, the buyer must buy foreign exchange using a spot or current market so that the delivery will also be fast. After all, there is only one option. If the buyer can make payments in the future, then he can either choose a spot market or a forward market. In a forward market, the delivery is also done in the future.

Citing an example for further understanding

Keisha is planning to buy a house in London a few months after her wedding with John, a local from London. The money that she will use comes in US dollars. Let us assume that she wants to take advantage of the Pounds to US Dollars exchange rate. That is why she decided to use a forward contract.

This way, no matter how the price fluctuates and the currency exchange rates change, she rests assured that she already secured the rate of her purchase in that predetermined time after a few months.

In another perspective, say Keisha wants to buy authentic London cookies that are priced in Pounds, after the import, she must pay these cookies in US Dollars. The concept would be the same as the time when Keisha wants to buy a house in London.