A currency futures contract is a legally binding contract that obligates the two parties involved to trade a particular amount of a currency pair at a predetermined price (the stated exchange rate) at some point in the future. Assuming that the seller does not prematurely close out the position, he or she can either own the currency at the time the future is written, or may “gamble” that the currency will be cheaper in the spot market some time before the settlement date and of course the buyer hopes the contract will increase in value. All of this depends on the price of the currency exchange rate going into the future relative to the start date of the contract.
In general, any spot market involves the actual exchange of the underlying asset; this is most common in commodities markets. For example, whenever someone goes to a bank to exchange currencies or trades the Forex Market, that person is participating in the Forex spot market.
Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.