Currency futures were created by the Chicago Mercantile Exchange (CME) way back in 1972 when bell-bottoms and platform boots were still in style.

 

Since futures contracts are standardized and traded on a centralized exchange, the market is very transparent and well-regulated.

This means that price and transaction information are readily available.

You can learn more about CME’s FX futures here.

Currency Options

An “option” is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option’s expiration date.

 

If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date.

 

Just like futures, options are also traded on an exchange, such as the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), or the Philadelphia Stock Exchange (PHLX).

However, the disadvantage in trading FX options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Currency ETFs

A currency ETF offers exposure to a single currency or basket of currencies.

Currency ETFs allow ordinary individuals to gain exposure to the forex market through a managed fund without the burdens of placing individual trades.

Currency ETFs can be used to speculate on forex, diversify a portfolio, or hedge against currency risks.

Here’s a list of the most popularly traded currency ETFs.

ETFs are created and managed by financial institutions that buy and hold currencies in a fund. They then offer shares of the fund to the public on an exchange allowing you to buy and trade these shares just like stocks.

 

Like currency options, the limitation in trading currency ETFs is that the market isn’t open 24 hours. Also, ETFs are subject to trading commissions and other transaction costs.

Spot FX

The spot FX market is an “off-exchange” market, also known as an over-the-counter (“OTC”) market.

The off-exchange forex market is a large, growing, and liquid financial market that operates 24 hours a day.

It is not a market in the traditional sense because there is no central trading location or “exchange”.

In an OTC market, a customer trades directly with a counterparty.

Unlike currency futures, ETFs, and (most) currency options, which are traded through centralized markets, spot FX are over-the-counter contracts (private agreements between two parties).

Most of the trading is conducted through electronic trading networks (or telephone).

The primary market for FX is the “interdealer” market where FX dealers trade with each other. A dealer is a financial intermediary that stands ready to buy or sell currencies at any time with its clients.

The interdealer market is also known as the “interbank” market due to the dominance of banks as FX dealers.

The interdealer market is only accessible to institutions that trade in large quantities and have a very high net worth.

This includes banks, insurance companies, pension funds, large corporations, and other large financial institutions manage the risks associated with fluctuations in currency rates.

In the spot FX market, an institutional trader is buying and selling an agreement or contract to make or take delivery of a currency.

A spot FX transaction is a bilateral (“between two parties”) agreement to physically exchange one currency against another currency.

This agreement is a contract. This means this spot contract is a binding obligation to buy or sell a certain amount of foreign currency at a price that is the “spot exchange rate” or the current exchange rate.

So if you buy EUR/USD on the spot market, you are trading a contract that specifies that you will receive a specific amount of euros in exchange for U.S dollars at an agreed-upon price (or exchange rate).