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Foreign exchange transactions that are settled immediately are said to occur in the spot market, while transactions to be settled at a future date occur in either the forward or the futures market.   These markets are summarized below:

 

1. Spot Market

 

The market for currency for immediate delivery.  The price of foreign exchange in the spot market is referred to as the spot exchange rate or simply the spot rate.

 

2. Forward Market

 

The market for the exchange of foreign currencies at a future date.  A forward contract usually represents a contract between a large money center bank and a well-known (to the bank) customer having a well-defined need to hedge exposure to fluctuations in exchange rates.  Although forward contracts usually call for the exchange to occur in either 30, 90 or 180 days, the contract can be customized to call for the exchange of any desired quantity of currency at any future date acceptable to both parties to the contract.  The price of foreign currency for future delivery is typically referred to as a forward exchange rate or simply a forward rate.

 

3. Futures Market

 

Although the futures market trading is similar to forward market trading in that all transactions are to be settled at a future date, futures markets are actual physical locations where anonymous participants trade standard quantities of foreign currency (e.g., 125,000 DM per contract) for delivery at standard future dates (e.g., March, June, September, and December).

 

The most active forward markets are those for the Japanese yen and the German mark.  Active markets also exist for the British pound, the Canadian dollar and the major continental currencies, the Swiss franc, the French franc, the Belgian franc, the Italian Lira and the Dutch guilder.  Forward markets for currencies of less developed countries are either limited or nonexistent.  The Chicago Mercantile Exchange trades futures contracts on yen, marks, Canadian dollars, British pounds, Swiss francs, Australian dollars, Mexican peso's and euros.