Types of Foreign Exchange Market

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A foreign-currency market is called the market in which foreign currencies are purchased and sold. The purchase and buying of currencies from various countries are carried out by the purchasers and sellers here.

In general, on the basis of the nature of the transaction, the foreign exchange market is classified into four categories.

Here are the following Foreign Exchange Markets are:

Spot market: a spot market is a delivery market immediately representing the foreign exchange segment that settles currency transactions (sales and purchases) within 2 days from the deal. This means that the seller and buyer conclude their deal for currency within two days of the deal.

The sales and purchase of foreign exchange are thus a spot market. A Spot Exchange Rate is the rate at which the transaction is settled. It is the dominant currency in the market.

Forward Market: The forward market refers to the transactions – to sell and acquire foreign currency in the future, typically after 90 days of the deal, at a specified date. This is when, after 90 days of the transaction, the buyer and the seller conclude a selling and purchasing contract with a fixed exchange rate now agreed, the foreign currency is called a forward transaction.

The future market is therefore the future foreign exchange transactions. A forward exchange rate is the exchange rate that buyers or sellers settle transactions in the future market.

Spot and forward markets are thus the major types of currency markets that are often helpful in the stabilisation of the currency.

Future Markets: A number of forward market problems can be solved by using the futures markets. Futures markets operate on the same principles as forward markets.

Option Market: When an investor purchases an option, they can buy or sell the underlying instrument, such as security, ETF, or even an index at a predetermined price and timeframe. In this type of market, ‘options’ are bought and sold.

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