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Currencies can be traded as spot trades and as futures derivatives. The spot forex market is the conventional forex market we are all used to, which is traded on online. Currency futures are traded as futures derivatives on the futures market in the US, the Chicago Mercantile Exchange.

Currency Futures vs Forex: The Similarities

Assets Traded: In currency futures vs. forex trading, the method of trading and the assets traded are the same. The trader is aiming to profit from the change in the exchange rate of one currency against an opposing currency.

Regulation: In the US, the Commodities and Futures Trading Commission (CFTC) carries out regulation of both the currency futures market and the spot forex market. However, this is not a universal situation as there are other regulatory bodies in other countries whose scope of regulation is different from what obtains in the US.

 

Currency Futures vs Forex: The Differences

When we talk about currency futures vs forex, there are a few points where there are differences. These are summarized below:

Location: The spot forex market is a global market, conducted over virtual exchanges online. In spot forex, there is no physical exchange whereas in currency futures, there is a physical exchange known as the Chicago Mercantile Exchange.

Settlement: The settlement of trades in the spot forex market takes a maximum of 2 working days, while settlement for currency futures is done every three months.

Leverage: The leverage for currency futures is 1:5, while that of spot forex is as high as 1:400 or 1:500. In the US, the leverage requirements are 1:50 for forex majors and 1:20 for exotic currency pairs. As a consequence, the margin requirements for currency futures trading are much higher than in spot forex trading. When considering whether to trade currency futures vs forex, the issue of leverage and margin is a very important consideration as it will determine which of the two investment channels a trader should select based on the funds he has available.

Pricing: The method of pricing for currency futures vs. forex is done differently due to the length of time it takes for settlement of the contracts involved. Futures contracts are settled every three months. In this time frame, it is possible that the interest rates of the individual currencies in a pairing may have changed. So at the time of initiation of the contract, dealers must factor in the interest rate differentials when working out the price quotes as pricing for futures cannot be changed once the contract is commenced. Spot forex requires more immediate settlement so the issue of interest rate differentials hardly arise.

Trading Cost: The trading costs of currency futures vs. forex differ. Traders pay transaction costs in terms of commissions on currency futures contracts, while the spot forex market prides itself in being a commission-free trading vehicle.

The idea behind this article is not to promote one form of currency trading over another, but rather to highlight the key points of similarity and difference between currency futures vs. forex trading. With these points, a trader can now decide which form of currency investment will suit him best.