Among the financial instruments, the most popular ones are retail forex, and spot FX. In addition, there is currency futures, currency options, currency exchange-traded funds (or ETFs), forex CFDs, and forex spread betting.
It’s important to point out that we are covering the different ways that individual (“retail”) traders can trade FX.
Financial instruments like FX swaps and forwards are primarily traded by institutional traders. We will not discuss those.
A futures contract is an agreement to buy or sell a certain asset at a specified price on a future date.
A currency future is a contract that details the price at which a currency could be bought or sold. These contracts set a specific date for the exchange.
Currency futures were created by the Chicago Mercantile Exchange (CME) in 1972.
Futures contracts are standardized and traded on a centralized exchange. This market is very transparent and well-regulated.
Price and transaction information are readily available on futures contracts.
An “option” is a financial instrument that gives the buyer the right or the option. The buyer, however, does not have 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 they 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. Exchanges such as the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), or the Philadelphia Stock Exchange (PHLX).
There is a disadvantage in trading FX options. The disadvantage is that the market hours are limited for certain options. Also, the liquidity is not nearly as great as the futures or spot market.