Forex Futures

What Are Forex Futures?

Forex futures are exchange-traded currency derivative contracts committing the buyer and seller to execute at a set price and foreordained time.

Grasping Forex Futures

The price of all futures contracts depends on the underlying asset which, in this case, will be a currency instrument. All forex futures are written with a specific termination date, at which point delivery of the currency must happen except if an offsetting trade is made on the initial position.

Forex futures fill two primary needs as financial instruments:

1. They can be utilized by companies, or sole owners, as a hedging vehicle to eliminate the exchange-rate risk inherent in cross-border transactions.
2. They can be utilized by investors to estimate and profit from currency exchange-rate variances.

The key difference between forex or spot trades and forex futures is that the former is over-the-counter (OTC), meaning it's not subject to exchange rules and regulations, while the last option, forex futures, is executed on laid out exchanges, principally the Chicago Mercantile Exchange (CME). The lack of an intermediary exchange powers forex brokers to have different liquidity suppliers. This prompts lack of transparency, more extensive spreads, and disparities on price statements.

Forex futures are derivative contracts that are cash-settled when they terminate on set dates, typically on the second business day prior to the third Wednesday in the accompanying contract months (March, June, September, December).

Forex futures are traded for a number of reasons. Right off the bat, due to the different sizes of the contracts, they are a decent instrument for early investors who need to trade more modest positions, and on the other hand, since they are liquid, huge scope investors will utilize them to take on critical positions.

Forex futures can likewise be hedging strategies for companies who have impending payments in foreign exchange. For instance, if a U.S. company has agreed to buy an asset from an European company with payment sometime not too far off, they might buy some euro forex futures to hedge themselves from an undesirable move in the underlying asset: the EUR/USD cross rate.

Features

• Hedging, to reduce exposure to the risk made by currency variances, and speculation, to possibly generate profits, are the two principal utilizes for forex futures.
• Forex futures are exchange-traded currency derivative contracts committing the buyer and seller to execute at a set price and foreordained time.
• The key difference between forex (SPOT FX) and forex futures is that the former isn't subject to exchange rules and regulations, while the last option is executed on laid out exchanges.