kinds-of-forex

Spot Market. Currency spot trading is the most popular foreign currency instrument around theworld, making up 37 percent of the total activity (See Figure 3.1). The features of the fast-paced spotmarket are high volatility and quick profits (as well losses). A spot deal consists of a bilateral contract whereby a party delivers a specified amount of a givencurrency against receipt of a specified amount of another currency from a counterparty, based on an agreedexchange rate, within two business days of the deal date. The exception is the Canadian dollar, in whichthe spot delivery is executed next business day. The two-day spot delivery for currencies was developedlong before technological breakthroughs in information processing. This time period was necessary tocheck out all transactions' details among counterparties. Although technologically feasible, thecontemporary markets did not find it necessary to reduce the time to make payments. Human errors stilloccur and they need to be fixed before delivery. By the entering into a contract on the spot market a bank serving a trader tells the latter thequota – an evaluation of the currency traded against the U.S. dollar or an other currency. A quotaconsists from two figures (for example, USD/JPY = 133.27/133.32 or, which is the same, USD/JPY= 133.27/32). The first from these figures (the left part) is called the bid – price (that is a price atwhich the trader sells), the second (the right part) is called the ask - price (the price at which thetrader buys the currency). The difference between asks and bid is called the spread. The spread, asany currency price alteration, is being measured in points (pips). In terms of volume, currencies around the world are traded mostly against the U.S. dollar, becausethe U.S. dollar is the currency of reference. The other major currencies are the euro, followed by theJapanese yen, the British pound, and the Swiss franc. Other currencies with significant spot market sharesare the Canadian dollar and the Australian dollar. In addition, a significant share of trading takes place in thecurrencies crosses, a non-dollar instrument whereby foreign currencies are quoted against other foreigncurrencies, such as euro against Japanese yen.The spot market is characterized by high liquidity and high volatility. Volatility is the degree towhich the price of currency tends to fluctuate within a certain period of time. For instance, in an activeglobal trading day (24 hours), the euro/dollar exchange rate may change its value 18,000 times "flying"100-200 pips in a matter of seconds if the market gets wind of a significant event. On the other hand, theexchange rate may remain quite static for extended periods of time, even in excess of an hour, when one