DEFINITION of currency futures
The currency futures contract that details the price at which a currency could be bought or sold and sets a specific date for the exchange.
WHAT IT IS IN ESSENCE
They are highly regulated. Any counterparty still holding the contract at the expiration date has legal obligation to take delivery of the currency on a certain date. And at a certain price.
They are a transferable futures contract. They specify the price, in one currency, at which another currency can be bought or sold at a future date.
This kind of contracts is legally binding. Counterparties must deliver the currency amount at the specified price on the certain delivery date.
Currency futures are using in order to restrict other trades or currency risks. Or to speculate on price movements in currencies.
A futures price differs from a spot price because it is not based on a current market value. But a potential market price in the future.
If an investor has a trade on a spot currency rate, they may use a currency futures contract to hedge against foreign exchange risks.
Both currency futures and currency forward contracts are financial derivatives.
They allow people to buy and sell currency pairs at a specific time and at a certain price. They are similar in nature, they operate with a few key differences.
A currency forward contract is an over-the-counter private transaction between counterparties. By contrast, a futures contract is traded via a public exchange.
Currency futures have legally binding terms and conditions,
Currency forwards are privately negotiated and specific to individual traders needs.
HOW TO USE
Over the last few decades, the popularity of currency futures has gone up tremendously. Some of the futures markets have an average daily trading turnover of over $100 billion.
One thing beginner futures traders often get confused about is forward and futures contracts.
If you are familiar with how other futures contracts work in the commodities market, then understanding foreign currency futures contracts should be relatively straightforward.
Similar to commodities futures, currency futures and options also enable the buyer of the contract to complete the transaction at a future date.
It is based on the current agreed on the price.
If you are new to trading, then you might want to further expand your basic understanding regarding futures contracts. Before diving into forex futures trading.