Types of commodity exchange - SS1 Commerce Lesson Note

Spot Exchange

A spot exchange refers to the immediate exchange of financial instruments or assets. It involves the direct purchase or sale of a commodity, currency, or financial instrument for immediate delivery and payment. For example, if you go to a currency exchange booth and exchange your money for a foreign currency at the current exchange rate, that would be a spot exchange.

Forward Exchange

A forward exchange involves an agreement between two parties to exchange a specified amount of a particular asset or currency at a predetermined price at a future date. The key difference between a spot exchange and a forward exchange is that the transaction in a forward exchange takes place at a future date rather than immediately. This type of exchange allows participants to hedge against potential price fluctuations or to lock in a future price.

Futures Exchange

A futures exchange is similar to a forward exchange but involves standardized contracts traded on a regulated exchange. These contracts obligate the buyer to purchase and the seller to sell a specified asset or commodity at a predetermined price and future date. Unlike forward contracts, futures contracts are standardized and can be bought or sold on the exchange before the expiration date. Futures exchanges are commonly used by investors and traders to speculate on price movements or to hedge against risks.

Options Exchange

Options give the holder the right, but not the obligation, to buy or sell an asset at a specified price within a certain period. This type of exchange allows participants to benefit from potential price movements while limiting their downside risk.