A wide variety of currency futures contracts are available. Unlike forex, wherein contracts are traded via currency brokers, currency futures are traded on exchanges that provide regulation in terms of centralized pricing and clearing. The market price for a currency futures contract will be relatively the same regardless of which broker is used. Traders and investors are drawn to markets with high liquidity since these markets provide a better opportunity for profiting.
The emerging markets typically have very low volume and liquidity, and they will need to gain traction before becoming competitive with the other established contracts. The G10 contracts, the E-mini and the E-Micro contracts are the most heavily traded and have the greatest liquidity. Figure 2 below shows some of the most popular currency futures contracts and their specifications.
Futures contracts, including currency futures, must list specifications including the size of the contract, the minimum price increment, and the corresponding tick value. These specifications help traders determine position sizing and account requirements, as well as the potential profit or loss for different price movements in the contract, as indicated in Figure 2.
This indicates that each time there is a. For instance, if a long trade is entered at 1. If that same long trade moves to 1. There are two primary methods of settling a currency futures contract. In the vast majority of instances, buyers and sellers will offset their original positions before the last day of trading a day that varies depending on the contract by taking an opposite position.
When an opposite position closes the trade prior to the last day of trading, a profit or loss is credited to or debited from the trader's account. Less frequently, contracts are held until the maturity date , at which time the contract is cash-settled or physically delivered , depending on the specific contract and exchange. Most currency futures are subject to a physical delivery process four times a year on the third Wednesday during the months of March, June, September, and December.
When a currency futures contract is held to expiration and is physically settled, the appropriate exchange and the participant each have duties to complete the delivery. The CME, for example, is responsible for establishing banking facilities in the United States and in each country represented by its currency futures contracts.
These agent banks , as they are called, act on behalf of the CME and maintain a U. In addition, futures contracts do not exist directly between clients for example, a buyer and a seller. Instead, each participant has a contract with a clearinghouse , greatly reducing the risk for buyers and sellers that a counterparty would fail to meet the terms of the contract.
Buyers participants holding long positions make arrangements with a bank to pay dollars into the International Monetary Market IMM delivery account, a division of the CME. The IMM is also the account from which sellers participants holding short positions are paid. The transfer of foreign currency occurs similarly in other countries. Essentially, a participant's delivering bank transfers the currency to the IMM delivery account, which then transfers the currency to the appropriate account.
Futures brokers, including those that offer currency futures, must follow regulations enforced by governing agencies including the Commodity Futures Trading Commission CFTC and the National Futures Association NFA , as well as rules set forth by the exchanges. For example, the CME Group, the largest futures exchange in the world, ensures that self-regulatory duties are fulfilled through its Market Regulation Department, including market integrity protection by maintaining fair, efficient, competitive and transparent markets.
Currency futures markets have a great deal more oversight that the spot forex markets, which are at times criticized for things like non-centralized pricing and forex brokers trading against their clients. Currency futures are exchange-traded futures. Traders typically have accounts with brokers that direct orders to the various exchanges to buy and sell currency futures contracts.
A margin account is generally used in the trading of currency futures; otherwise, a great deal of cash would be required to place a trade. With a margin account, traders borrow money from the broker in order to place trades, usually a multiplier of the actual cash value of the account. Buying power refers to the amount of money in the margin account that is available for trading.
Different brokers have varying requirements for margin accounts. In general, currency futures accounts allow a rather conservative degree of margin leverage when compared to forex accounts that can offer as much as leverage. Both currency futures and forex are based on foreign exchange rates; however, there are many differences between the two:. Investors and traders interested in participating in the foreign exchange market have options. Forex and currency futures offer traders unique vehicles with which to hedge or speculate.
The currency futures market is similar to other futures markets and provides participants a means of entering the foreign exchange market with greater regulation and transparency. CME Group. Accessed Oct. Options and Derivatives.
To take advantage of relatively small moves in the exchange rates of currency, we need to trade large amounts in order to see any significant profit or loss. As we have already discussed in our previous article, currency movements are measured in pips and depending on our lot size a pip movement will have a different monetary value. We are looking for the exchange rate to rise i.
This is the equivalent of pips. Therefore lot sizes are crucial in determining how much of a profit or loss we make on the exchange rate movements of currency pairs. We do not have to restrict ourselves to the historical specific amounts of standard, mini and micro. We can enter any amount we wish greater than 1, units. So with a Euro-denominated account a fall of 50 pips to Trading with leverage allows traders to enter markets that would be otherwise restricted based on their account size.
Leverage allows traders to open positions for more lots, more contracts, more shares etc. This is what we call our margin. For each position and instrument we open, our broker will specify a required margin indicated as a percentage. Margin can, therefore, be considered a form of collateral for the short-term loan we take from our broker along with the actual instrument itself.
For example, when trading FX pairs the margin may be 0. Other platforms and brokers may only require 0. The margin requirement is always measured in the base currency i.
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Tick Size – the minimum increment of the price. Lot Size – a quantity of the underlying asset units in a single standardized contract ( Lots). CME listed FX futures offer more precise risk management of EUR/USD exposure through firm pricing, convenient monthly and quarterly futures and weekly.