A Currency Futures contract is trading the currencies and selling or buying it in an agreed rate at a future date. Currency futures trading is not a new type of trading. It is the same as other futures trading. Currency futures originated in one of the largest market in the world, the Chicago Mercantile Exchange, in the year 1972.
Currency Futures Trading
Currency futures trading is one of the standardized trades which occurs in exchange. Based on the volume and speculations, the price of the futures either rise or decrease, the value of futures price changes from the value of futures contract.
In Currency futures trading, the popular currency pairs are,
- EUR/USD (The Euro to US Dollar currency future),
- GBP/USD (The British Pound),
- CHF/USD (The Swiss Franc),
- AUD/USD (The Australian Dollar),
- CAD/USD (The Canadian Dollar),
- RP/GBP (The Euro to British pound currency future),
- RF (The Euro to Franc currency future).
These are the popular ones, and there are many other currency futures available to trade.
Profit in currency futures trading
In currency futures trading you can calculate the profit by the change in sale price against the buy price. A tick value denotes the number of difference between the buy and sell price. The name 'Tick' can be said as increments. Each underlying currency has its own, different tick value. You can see those values on the exchange websites. The profit or loss can be calculated by the ticks which are formed or lost in a trade.
In currency futures trading, traders can break the contract to buy or sell the underlying currency before the specified date by closing the position. This type of trading can happen in contracts only in which Mexican and South African rand are not involved in the currency futures trading. Most of the traders anticipate the trade and close it before the specified date to make money for themselves depending on the price change.
The spot rate in currency futures
Spot rate has another name, spot price. The spot price is the price value, which is quoted for the immediate conclusion of the settlement. If the spot rate increases, the rate of the future currency may also increase. If the spot rate decreases, the rate of the futures currency decreases. In rare cases, this might change. For example, if the spot price increases, the currency rate may decrease.
Currency futures and currency forwards
Currency forward contracts are another financial derivatives like currency futures. Currency forward contract happens in the foreign exchange market, and it is an over the counter market because they don't trade on the centralized exchanges. Currency forward contract locks the exchange rate in the market for the process of buying and selling the currency on a future date. Currency forwards has another name, outright forwards.
The overall advantages of currency futures trading are,
- Stable market,
- Eliminates counterparty risks,
- Can trade above foreign allocation
- The trader can fix prices
- Transparent transaction cost
Disadvantages of Currency futures trading are,
- Only limited currencies can be used to trade,
- Delivery dates are limited,
- Limited contractual amounts.
- Firm contract size.
Currency futures trading usage and its similarities
Currency futures trading can be used by investors, importers, and exporters. As said above, Futures and currency markets are bit similar. For example, A currency market like forex is traded via forex brokers whereas futures are traded via exchanges. Meanwhile, currency futures trading is more regulated than forex. Even though currency futures trading are regulated, there are millions of users using forex in a day to day life and making profits. No trading platform is superior to one another. Everything has its uniqueness to provide profit. However, different platforms suit different people.
Trading has both sides, profit, and loss. Even currency futures trading also has both advantages and disadvantages during the trade. Even though the price value tends to rise and give profit in the future date, there are some trades in which there are risks of the adverse price move in the future. i.e., the price may decrease in value. So the currency futures trading should be handled mindfully by speculation.