Which deal (with banks or money market) is the best way to maximize earning?
SPOT AND FUTURE RATE: The relationship between spot and future rate may be seen through:
(1) Spot Rate - Future Rate = Finance charges
This relationship must be maintained. The finance charges or carrying costs may be estimated (or changes little), thus making spot rate approximately equal future rate. Therefore, if there are differences, their might be discrepancy in one of the components. For instance, the announcement for changes in interest rate my have an effect on the demand for money supply. This may make the future rate change and the future rate may be more reflective of reality----as the result the spot rate must also change to keep up with changes in future expectation. The adjustment time is small thus maintaining the condition in equation (1).
HOW DO WE DEAL WITH AN ECONOMY WITHOUT FUTURE MARKET? There are less advanced markets where there is no future contracts, in such situation, we are limited to spot rate. The agent may exchange currency for gold or other forms of "value storage" as a risk management tool.
RISK MANAGEMENT: The use of spot rate is an absence of risk management, i.e. the agent is not doing anything in terms of risk management. For that reason, in the market where future contract is not available, the agent has to find other tools for risk management outside of exchange rate venue. in the market where there are future contracts, the question becomes moot because future contract is a tool for risk management where spot rate exposes the agent to risk.
The issue then is not which rate (spot or future) is a better tool, but how well the agent use the available information to translate into risk exposure and act accordingly whether to engage spot or future contracts.
I believe that money market is the place that you can find a chance to gain earnings cause even banks trade in money markets. If you are a short-term trader (scalper), you must go to money market. If you are a long term trader, there is no much different between them. But I personally prefer to trade in money markets since it is very volatile compared to banks.
Whether you trade via a bank or directly through the money market, a spot rate or for that matter the forward rate is not a tool to make 'earnings.'
If you purchase your FX via spot, you will be exposed to any future fluctuations in the exchange rate. It may move in a direction that is in your favor or otherwise.
Similarly, in the case of purchasing a forward (where this is possible), a forward rate captures the expected changes in the future interest rates of the two countries (and therefore the exchange rates) along with a risk premium by the dealer. Once you purchase a forward rate contract, you know the exchange rate that you will receive in the future.
For example, if you expect to receive a EUR-USD 1.1054 six months from now; the exchange rate movement may be above or below this rate in six months. The benefit of the forward contract is that it takes away uncertainty for your internal book-keeping purposes and hedges you against upward or downward movements on the day in the future. However, it does not guarantee 'earnings.'
Generally, purchasing currency via a spot rate today and sitting on the currency or through a forward contract in the future is a risk management decision and not an earnings play - unless you are speculating, in which case you are likely willing to take the exposure to an upward (or the downward) swing in rates.
There is no relationship between the risk management and spot deals. The most important part of managing risk is the nature of exposure. This can be managed either by diversification or working with the futures markets.
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