What Are Currency Futures?

Currency futures are an exchange-traded futures contract that specify the price in one currency at which another currency can be 澳洲幸运5官方开奖结果体彩网:bought or sold at a future date.

Currency futures contracts are legally binding, and counterparties that are still holding the contracts on the 澳洲幸运5官方开奖结果体彩网:expiration date must deliver the currency amount at the specified price on the specified delivery date. Currency futures can be used to hedge🤡 other trades or currency risks, or to speculate on price movements in currencies.

Currency futures may be contrasted with non-standardized 澳洲幸运5官方开奖结果体彩网:currency forwards, which trade over the counter (OTC).

Understanding Currency Futures

The first currency futures contract was created at the 澳洲幸运5官方开奖结果体彩网:Chicago Mercantile Exchange (CME) in 1972, and it is the 澳洲幸运5官方🐷开奖结果体彩网:largest market for currency futures in the world today. Currency futures contracts are 澳洲幸运5官方开奖结果体彩网:marked-to-market daily. This means traders are responsible for having enough capital in their account to cover margins and losses that&🔯nbsp;result after taking the position.

Futures traders can exit their obligation to buy or sell the currency prior to the contract’s 澳洲幸运5官方开奖结果体彩网:delivery date. This is done by closing out the position. Except for contracts that involve the Mexican peso and South African rand, currency futures contracts are physically delivered four times a year on the third Wednesday of March, June, September, and December.

For example, buying a Euro FX future on the U.S. exchange at 1.20 means the buyer is agreeing to buy euros at $1.20 USD. If they l🎉et the contract expire, they are responsible for buying 125,000 euros at $1.20 USD. Each Euro FX future on the Chicago Mercantile Exchange is 125,000 euros, which is why the buyer would need to buy this much. On the flip side, the seller of the contract would need to deliver the euros and would receive U.S. dollars. 

Most participants in the futures markets are 澳洲幸运5官方开奖结果体彩网:speculators who close out their positions before the futures expiry date. They do not end up delivering the physical currencyﷺ. Rather, they make or lose money based on the price change in the futures c🥂ontracts themselves. 

The daily loss or gain on a futures contract is reflected in the trading account. It is the difference between the entry price and the curr🦄ent futures price, multiplied by the contract unit, which in the example above is 125,000. If the contract drops to 1.19 or rises to 1.21, for example, that would represent a g𝓡ain or loss of $1,250 on one contract, depending on which side of the trade the investor is on.

Difference Between Spot Rate and Futures Rate

The currency spot rate is the current quoted rate that a currency, in exchange for another currency, can be bought or sold at. The two currencies involved are called a “pair.” If an investor or hedger conducts a trade at the currency spot rate, the exchange of currencies takes place at the point at which the trade took place or shortly after the trade. Since currency 澳洲幸运5官方开奖结果体彩网:forward rates are based on the currency spot rate, currency futures tend to chaꩵnge as the spot rates change.

If the spot rate of a currency pair increases, the futures prices of the currency pair have a high probability of increasing. On the other hand, if the spot rate of a currency pair decreases, the futures prices have a high probability of decreasing. This isn’t always the case, though. Sometimes the spot rate may move, but futures that expire at distant dates may not. This is because the spot rate move may be viewed as temporary or short-term, and thus is unlikely to a⛎ffect long-term prices. 

Currency Futures Example

Assume hypothetical company XYZ, which is based in the United States, is heavily exposed to foreign exchange risk and wishes to hedge against its projected receipt of 125 million euros in September. Prior to September, the company could sell futures contracts on the euros they will be receiving. Euro FX futures have a 澳洲幸运5官方开奖结果体彩网:contract unit of 125,000 euros. They sell euro futures because they are a U.S. company, and don’t need the euros. Therefore, since they know they will receive euros, they can sell them now and 澳洲幸运5官方开奖结果体彩网:lock in a rate at which those euros can be exchanged for U.S. dollars. 𒊎

Company XYZ sells 1,000 futures contracts on the euro to hedge its projected receipt. Consequently, if the euro depreciates against the U.S. dollar, the company’s projected receipt is protected. They locked in their rate, so 🍃they get to sell their euros at the rate they locked in. However, the company forfeits any benefits that would occur if the euro appreciates. They are still forced to sell their euros at the price of the futures contract,🔥 which means giving up the gain (relative to the price in August) they would have had if they had not sold the contracts.

The Bottom Line

Cu👍rrency futures are exchange-🐲traded futures contracts that specify the price in one currency at which another currency can be bought or sold at a future date. The rate for currency futures contracts is derived from spot rates of the currency pair.