Futures contracts are exactly what they sound like: contracts to buy or sell a specific asset (this can be anything from a commodity to an index to stock) in the future at a predetermined price. Since they are based on the spot price of an asset (i.e., the current price paid for the asset), futures are precisely like betting on an event to happen at a specific time.
Forex (short for foreign exchange) is a form of the futures market that occurs on a worldwide exchange of more than $5 trillion. Instead of buying or selling contracts on an asset, forex traders purchase or sell a currency. You can go for one of the best forex trading brokers in south africa for doing best practices.
Traders use this currency to make purchases and sales on the foreign exchange market and take positions using a combination of purchases and sales of currency or other assets. This is the one thing that separates Forex from futures markets. While futures markets are tied to the asset’s spot price, Forex is tied to a currency.
What is Different about the Two?
Compared to futures, there are some key differences between futures and Forex. Let’s see other main differences:
Ø Interest Rates
Futures typically include implied (but not necessarily explicit) interest rates such as implied yields for all asset classes and rates that could be used to compare investments in a portfolio.
Forex typically doesn’t offer this opportunity because you don’t know the exact rate used for that currency unless you have an investment grade-C financial institution like a bank on-shore (all the Forex currency trades are on-shore). This is a significant reason to stick with the futures market.
Futures contracts are denominated in US Dollars (US$), while Forex is denominated in the currencies of the banks in which they are traded. For example, you may see a contract offered in US Dollars for Gold (Gold in the futures market is USD-denominated) and a contract offered in the Brazilian Real (Brazilian Real is USD-denominated) for an asset like Gold.
Both are equivalent to the same asset; however, in the Forex market, they might not trade at the same rate since they are not based on the exact exchange rate.
Ø Fair Price
In the futures market, there is typically an implied price for the underlying asset(s) or the market price for the spot price at the time the contract is traded.
On the other hand, there is no implied price in the Forex market since it is based on the foreign exchange rate at that time.
Which is Better?
In terms of comparison for Forex versus Futures, Forex is much more liquid than futures, and because Forex transactions are often traded on the “dark” exchanges, they have less-cluttered trading platforms than Futures. Additionally, Forex has an equity market that ensures a regular cash flow on top of the futures market. Forex tends to be more liquid, more flexible, less complex and may be a better bet for those who don’t have access to the hedging tools of the futures market.