Let me talk a little bit about the spot market. Spot for most currencies is usually two business days, and the major exception is the USD versus the Canadian dollar, which actually settles on the next business day. All of the other pairs are settled within two business days. During this period, we should not consider any holidays like Easter holiday, Christmas holiday or Thanksgiving. The price is actually established on the same day as the trade, but the money is actually exchanged on the value date.
Did you know that the USD is one of the most actively traded currency every single day?
On most days, it is the most actively traded currency. It will also interest you to know that the most common pairing is the USD versus the euro, the Japanese Yen, the British Pound (GBP) and the Australian Dollar. Another common pairing is the euro and the pound.
You should also know that the spot market can actually be very volatile in nature. The movement is completely dominated by technical trading activities. It focuses on the direction and the state of the movement.
In this guide, I will also be talking about how you can understand FX basis. FX is basically foreign exchange. The difference is between the future price, and the spot price of a currency pair is actually referred to as the basis. You need to understand that, before we can move along. Keep in mind that basis can either be negative or positive as well. It will completely depend on the relationship between any short-term interest rates of the base and also the terms which are being considered in the currencies. The base currency is also known as the first currency in the entire currency pair quotation.
The price of FX futures product is completely based on the currency pair and this portrait of the same. The pricing formula is very similar to how foreign exchange forwards are priced in the entire market. The equation: R= short-term interest rate of a given currency, d= the number of days from the starting of the trade settlement and until the expiration date.
For the foreign exchange futures, the basis is the entire difference between the futures prices and also the spot price of the currency pair.
You should also note that there is a cost of consideration when it comes to foreign exchange futures products. This happens to be the determining factor in which the trades or at a discount or at a premium spot.
If all the terms are rated higher than the base rate, the futures should actually trade at a premium, to the spot price of the currency which is being considered.