What are Currency Futures? | Definition
Our team has come up with an article on the currency futures where it discusses about the know hows of the currency market futures their delivery, contract size ,average volume traded on a daily basis as well as the maturity.Moreover concepta like how the investors use currency as a tool to hedge their exposure as well as speculate the future position and invole in trades.
Currency futures is done on the foreign exchange market/currency/forex/or FX. FX transactions typically involve one party (usually a bank or other official institution) purchasing a quantity of one currency in exchange for paying a quantity of another. The FX market is one of the largest and most liquid financial markets in the world. The trading takes place between large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing and the average daily turnover is around $3.98 trillion US.
Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates- agreed upon price at an agreed upon future date. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts. Typically, one of the currencies is the US dollar.
Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in the currency of the underlying contract. Investors can close out the contract at any time prior to the contract’s delivery date and most contracts are closed out before the actual delivery date.
Investors use these futures contracts to hedge against foreign exchange risk. If an investor will receive a cash flow denominated in a foreign currency on some future date, that investor can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cash flow. Basically, an investor can lock in the value of the transaction at today’s exchange rates.
Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. In this manner, an investor can speculate on a specific currency becoming weaker or stronger compared to the US dollar at a future date.
Currency futures are not to be confused with currency markets. Futures based upon currencies are similar to the actual currency markets, but there are some significant differences. For example, currency futures are traded via exchanges, such as the CME (Chicago Mercantile Exchange), but the currency markets are traded via currency brokers, and are therefore not as controlled as the currency futures.