Trade Forex - Forex Market

There would be little likelihood of correlation if there were no mechanism for keeping the two markets parallel. A futures contract for copper, say, is prevented from trading away from the cash copper market by the fact that the contract can be converted into physical copper. It is this ability to forex for physicals that maintained the price of gold at $35 an ounce during the Bretton Woods era. The same convertibility kept the value of the Mexican peso close to $0.35 for years. Without convertibility, there could be no arbitrage, and without the prospect of arbitrage there would be no price correlation. The most important aspect of convertibility, from a hedging standpoint, is price convergence. Price convergence occurs as a futures contract nears the delivery period. Forex institute carrying charges become minimal; therefore, the price of the futures contract nears the spot price of the underlying good. Convert ability and convergence can be thought of as functions of each other. In fact, a general rule is:
Whenever there is a future point in time at which one market item can be converted easily and without significant cost into another market item, the two prices wiJ1 converge at that time. The two markets wiJ1 trade in parallel up until that time, with the basis maintaining a hedge able correlation coefficient.

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