Forex against futures
In futures market there is a purchase/sale not of goods themselves but goods’ contracts, that is assets. Currently, futures’ market has a global status and here become mentioned:
- industrial production goods,
- treasury bounds,
- agricultural production.
The futures market is a dynamically developing trading platform which regulates carefully by the legislation of every state within which trading takes place. Of course, it is less liquid market than Forex, because currency trade has more trading volumes than securities but it does not make futures market less attractive for buyers and sellers around the world.
How does the futures market deal
Here is a small example. Suppose, that farmer and baker agreed that the first will deliver for the second 1000 bushels of wheat for $5/bushel. If the price collapse on wheal’s futures to $4/bushel will happen by day, farmer earns $1000 ($5 — $4 * 1000 bushels) and this amount will be debited from the baker’s account.
As a result, if the wheat futures’ price will be $4, farmer will earn $1000 and baker will lose $1000.
But there is a second side of the coin. That baker can buy wheat on open market that costs $4/bushel — that is $1000 less than the first contract. This price appeared on market because of decrease in the cost of wheat. With all this, farmer will sell his wheat at $4 that is less than he planned when entered the futures contract but the profit which was earned from the same first futures contract will make up this difference.
Differences between Forex and futures market
Forex trading is held approximately in the same way but there is not any goods’ delivery. The last characteristics cause high attractiveness of the foreign market and determine all its advantages over the futures market:
- Forex is the largest financial market in the world and the most liquid. The orders here are executed much easier and with less slippage that in other markets, including futures one.
- Forex market is twenty-four-hour open. Although its official schedule of work is 24 hours, due to change of time zones traders can sell currency constantly.
- Forex operations are excused instantly.
- Forex brokers do not incur the commission and other fees in traders – they earn on spread.
In general, the liquidity of Forex is due to the fact that it trades just currency – the most liquid commodity in the world. It provides an influx of participants who form and support the currency supply. The circle is closed. It is unlikely that this system will ever fail.
Some investors hold the opinion that thanks to this state of affairs Forex market is much safer than futures market.