Forex trading futures are exchange-traded, legally binding financial contracts through which buyers and sellers agree to buy and sell a standardized contract amount of a currency in exchange for another by locking in future exchange rates. These contracts expire on a pre-defined future date. These are also called FX trading futures or currency futures. Forex futures trading can take place at any time until the contract expires. Traders can avoid their trades from being influenced by further changes in foreign exchange rates by closing out their positions.
Typically, traders close out contracts before expiration, and the difference between the exchange rate of initial transactions and the rate of an opposite closing transaction is covered in cash.
Where is Forex Trading Futures Traded?
Forex futures trading takes place in specialized futures exchanges according to their rules and regulations. Trading can happen on the floors of futures exchanges. Members can also trade currency futures on the electronic trading system provided by futures exchanges. The world’s largest futures exchange is the Chicago Mercantile Exchange that has offices in London and Tokyo, apart from Chicago, Washington and New York.
Forex trading futures are standardized contracts, the specifications of which are set by the futures exchanges. Thus, buyers and sellers can only negotiate the exchange rate, whereas the futures exchanges set specifications, including the underlying currency, delivery month and trading unit.
How Popular are Forex Trading Futures?
After the Bretton Woods system of fixed exchange rates collapsed in 1971, the system of currency futures came into practice. Their popularity is growing rapidly as these are typically traded by bankers, multinational corporations, exporters, importers and private speculators.
These are basically used as financial instruments for the following two purposes:
To eliminate the exchange-rate risk typically associated with cross-border transactions by companies or sole proprietors.
To speculate and make profits from volatility in currency exchange rate by investors.
Many companies use forex trading futures for hedging by either buying FX futures to meet their future payables or selling FX futures to cover their future receipts.
Forex trading futures involve high levels of risk. For example, an investor can end up losing his/her entire deposit if the exchange rate takes an unfavorable direction by even a small margin. Due to this, investors must understand how this segment of the financial market works before entering into it.
