Forex Futures

Forex Future is a financial derivative to buy or sell currency pairs at a predetermined price, and date. Learn all about currency futures with example. 

Open Account

Have you ever thought of trading in currencies but are afraid of the over-the-counter market? If yes then here is an alternative way to trade in currencies. 

One can trade in currencies in a number of ways. Forex Futures is one such way. However, many traders are unaware of these derivative contracts. Thus, in this blog, we will have a detailed study of currency futures, their features and benefits, and how they differ from spot trading. 

What are forex futures?

Forex Future is a financial derivative contract to buy or sell currency pairs at a predetermined price and specified date. These contracts can be settled in cash or physically delivered on the maturity date. 

Unlike forex or spot markets, the fx futures are traded on established exchanges. One can trade futures on the Chicago Mercantile Exchange, New York Mercantile Exchange, Singapore Exchange, or any other, depending on the currency pair and location. 

Let us understand it with a EURUSD future contract example. Suppose a trader thinks that the EURO is all set to rise against USD in the upcoming months. 

So, the trader decided to enter a future contract at the exchange rate of 1.10 after three months. On the expiry date, the traders will buy the EUR to USD futures contract at the rate of 1.10.

Now, if the prediction becomes true and the exchange rate rises to 1.15, the trader will make a profit. And if the exchange rate drops and reaches 1.08, the trader will lose money. 

One thing you need to remember while trading in currency futures is that you need to execute the trade at the expiry date. It means that regardless of whether the market is moving in your favor or not, you are obliged to enter a trade. 

Forex-Future

Components of FX Futures Contract

A future contract is a way to buy or sell currencies based on a set of rules and regulations. So, if you are thinking of starting forex futures trading, then you should know the below components: 

Underlying Asset: The underlying asset is the financial instrument you are trading in. Traders can trade stocks, commodities, currencies, and many other products in the future market. In the FX futures contract, the currency pair you are trading in will be your underlying asset. 

Exchange Rate: The exchange rate is the rate at which one currency is exchanged against others. For example, the predetermined rate of EUR/USD currency is 1.20. This means that a trader can buy one EURO, which is equal to 1.20 USD. So, to buy one unit of EURO, a trader needs to pay 1.20 USD. 

Contract Size: With date and currency pair, the trading quantity is also predetermined. A contract size can be defined as the number of units you are willing to buy or sell at a particular date.  

Maturity Date: The maturity or expiry date is the date at which the contract is settled. On this date, the currency will be delivered or settled in cash. 

Why trade forex futures

Forex Market Size One can trade forex in forward, spot, options, and over-the-counter markets. So why should you go for a currency futures contract? If you are also thinking the same way, here are the reasons you should trade currency futures:

Regulated environment: The Forex market is an over-the-counter market with no central organization to regulate its activities. Thus, many traders avoid currency trading due to a lack of regulations.

However, with a futures contract, you can trade in currencies with proper regulations and transparency. These contracts are traded on respective exchanges with standardized terms and conditions.

Suitable for all: Future contracts are suitable for beginners, advanced traders, and even for institutions or businesses. Also, one can trade in futures using different trading strategies. It includes arbitrage, spread betting, speculations, and others. In addition, whether you are a full-time trader, side hustler, or long-term investor, you can go for these contracts.

Risk management and diversification: For trading in the financial market, spreading your capital into different instruments or markets is a must. Future contracts can be ideal options for risk management and portfolio diversification. So, irrespective of the market you are trading in, you can consider futures for diversification.

Best for hedging: Hedging is the way to offset the risk associated with currency price fluctuations. Businesses, MNCs, and large institutions exchange currencies to conduct day-to-day business activities.

A small rise or fall in the exchange rate may result in big losses for such organizations. Thus, forex futures are the best way to lock the exchange rate and deal with currency price fluctuations. 

High liquidity and leverage: The future market offers high liquidity to the traders. It means entering or exiting a trade position with such derivatives is easy due to the large number of participants. 

In addition, one can use high leverage facility trading in futures. So traders can control large positions with small capital by using a leverage facility.

Wrapping Up

Every trader has different trading needs and expectations from the market. So traders need to first analyze these needs and determine whether forex futures suit them.

Also, if you want to trade in futures, a clear understanding of these financial derivatives is a must. Futures can be an excellent way to invest your capital but with proper knowledge and the right strategy.