Forex Futures

Forex futures are exchange-traded contracts to sell or buy a set amount of a particular currency at a specified date and at a predetermined price. Forex futures come with a termination date and at this point, currency delivery should occur or an offsetting trade is being made on the initial position.

These futures were initially introduced on the Chicago Mercantile Exchange. In the early 70s, not all commodity traders on the exchange could join the interbank exchange markets. At this time, it was believed that important changes would be implemented in the currency markets. In 1972, the commodity traders decided to establish the International Monetary market, launching trading in 7 currency futures.

As a type of financial instrument, forex futures have two main functions to consider. First, these are used by sole proprietors and businesses that seek to eliminate the exchange rate risk typical of the cross-border transactions. Second, forex futures are used by various investors who aim to make speculative profits from the fluctuations of currency exchange rates.

Forex futures are also known as foreign exchange futures, FX futures, and currency futures. In the typical case, the US dollar is one of the currencies, and the price of the future will be in US dollars per one unit of another currency. In every contract, the trade unit represents a set amount of the other currency, for example €75,000. Most of the contracts come with physical delivery. Payments will be made in each currency for the ones that are held at the closing of the last trading day. Most contracts of this nature are closed out before their delivery date. In fact, investors are allowed to close out their contract at any point prior to the delivery date of the latter.

Future contracts are used by the investors as a way of hedging against risk. If investors are to receive cash flows denominated in another currency at some point in the future, they may proceed by locking in the current exchange rate. This is done by using offsetting currency futures positions which expire on the cash flow’s date.

For instance, imagine that you are an US investor, and you are about to get €250,000 on March 8. With a current exchange rate of $1.2/€, you may lock in this rate if you sell €250,000 worth of foreign exchange futures expiring on March 8. In this manner, you are guaranteed that the exchange rate will remain at $1.2/€, no matter what the exchange rate fluctuations will be. FX futures are also used for speculative purposes as to make profit from the falling or rising exchange rates.

Among the most popular currency futures are the following: EURO to Swiss franc currency future, the EURO to US dollar currency future, the EURO to GBP currency future, the Canadian to US dollar currency future, the Australian dollar to US dollar currency future, the GBP to US dollar currency future, and the Swiss franc to US dollar currency future.