Forex reserves' purpose

Reserves allow a central bank to purchase the issued currency, exchanging its assets to reduce its liability. The purpose of reserves is to allow central banks an additional means to stabilize the issued currency from excessive volatility, and protect the monetary system from shock, such as from currency traders engaged in flipping. Large reserves are often seen as a strength, as it indicates the backing a currency has. Low or falling reserves may be indicative of an imminent bank run on the currency or default, such as in a currency crisis. Central banks sometimes claim that holding large reserves is a security measure. This is true to the extent that a central bank can prop up its own currency by spending reserves. But often, very large reserves are not a hedge against inflation but rather a direct consequence of the opposite policy: the bank has purchased large amounts of foreign currency in order to keep its own currency relatively cheap.

Difference Between Spot and Futures in Forex

Before a description of retail trading, it is important to understand the difference between the Spot and Futures markets. Futures are generally based on contracts, with typical durations of 3 months. Spot, on the other hand, is a two-day cash delivery. While the Futures markets was created to hedge out risks and speculate on future market conditions, Spot was created to allow actual cash deliveries. Spot developed a two-day delivery date in order to give those transporting the actual cash a window of time to receive it. While in theory there still is a two-day delivery date imposed after a Forex transaction, this is effectively no longer used. Every day, at 5 pm EST (the predetermined end of the trading day) Spot positions are closed and then reopened. This is done in order to guarantee an unlimited timeline for delivery.