What Does Forex Futures Mean?
A Forex future is defined as a contract bought and sold on the currency exchanges to sell or purchase a particular amount of currency at a predetermined price at a definite date in the future. Forex futures trading orders are written with a particular termination and ending date, at which the delivery of the specified currency should take place unless an off-set trade is created on the open position. Actual currencies are rarely delivered, as the underlying Forex futures contracts are sold before expiration date, just as with commodities trading.
Investopedia Explains Forex Futures
Trading Forex futures serves mainly two purposes that are basic in the terms of fiscal instruments. First, they are used by financial and large institutions in order to eliminate or mitigate the risks of the currency exchange rate, which is always a factor in transactions of cross-border commerce. Secondly, they are used by investors in order to speculate on changing prices and make profits from currency fluctuations of the currency exchange rates.
Advantages and Disadvantages of Futures compared to Forex Spot Trading
One great advantage when you trade Forex futures instead of the Forex spot market is that the futures market is much more regulated than the Forex spot market. However, your initial Forex investment in the futures market will be greater than the funds needed to capitalize your Forex spot market account to trade with the same amount of leverage. This is because the leverage offered by brokers in the futures market is much smaller than the leverage offered in traditional Forex trading.
It is critical to find a great Forex futures broker when you begin your currency trading career. Of course, there are several reputable Forex futures brokers in the Forex spot market, such as ACM Forex (AC Markets), MB Trading and others, even though the trading overall is much less regulated than the futures market.
Currency Futures
Forex futures trading establishes a legal contract between the sellers and buyers in order to sell or buy a particular amount of currency at a particular rate of exchange over a specific period of time. The delivery date of the currency is a specific date in the future. These transactions are also known as currency futures or foreign exchange futures. They are traded on specialized currency futures exchanges.
Future Forex and Future Exchanges
Forex futures are traded according to the rules and the regulations described by the futures exchanges. The future exchanges allow orders to be executed either through floor trading or via electronic trading methods. The world’s most successful and largest exchange for investing and trading in the Forex futures is the Chicago Mercantile Exchange, which has its offices in Tokyo, London, New York and Chicago.
Forex Futures as Standardized Contracts
Just like other futures contracts, futures Forex trading is also a standardized contract. The specifications of the contract have been set by the futures exchange. Sellers and buyers can only negotiate the exchange rate. All the remaining details and rules are set by the futures exchanges, such as delivery month, trading unit and underlying currency.
The Use of Forex Futures
Forex futures trading is used by many companies for the purpose of hedging. These companies buy the Forex futures for the future payables or can sell the currency futures for future receipts. The hedge managers can also sell or buy futures on the foreign exchange to protect themselves against unexpected strengths and weaknesses of the U.S. dollar. For example, if a U.S. company has a large amount of international sales in France, they may want to hedge the French Franc falling against the U.S. dollar by purchasing French Franc’s at the current high prices for delivery in six months. If the French Franc falls in value and the company receives less in U.S. dollars from its sales in France, then they are protected as they have locked in a certain dollar amount of currencies at the higher Franc price. If the French franc actually increases in value, the U.S. company will have an increase in U.S. dollars from the sales of its products in France, which would offset the loss from its hedge trades. In essence, hedging allows the company to take the uncertainty out of the fluctuations of the exchange rate between currencies. This principle is exactly the reason pay for insurance, to reduce the uncertainty of an unexpected high medical bill by paying small premiums over time.
Risks of Forex Futures
Forex futures trading involves risks. Unlike Forex spot trading where you can usually only lose the amount in your account, futures trading has margin calls where you can actually much more than what is in your account. Investors should only be active in Forex trading if they are fully knowledgeable about it and have practiced trading for many months using a demo account. Trading Forex futures or the Forex spot market is a serious business, not an opportunity to gamble.