Forex futures

Forex futures are exchange-traded currency derivative contracts which oblige a buyer to buy a given amount of a given currency at a set price and predetermined time. They are used for two main reasons: hedging, to reduce exposure to the risk associated to currency fluctuations, and speculation, to gain profits from currency exchange-rate fluctuations.

Spot forex and forex futures are not synonyms, as the former is traded over-the-counter (OTC), meaning it’s not subject to exchange rules and regulations, while the latter is traded on regulated exchanges, like the Chicago Mercantile Exchange (CME).

Like any other derivative, the price of futures depends on an underlying asset which, in forex markets, is a currency or a basket of currencies. All forex futures contracts contain a specific termination date, at which point delivery of the currency must occur, unless an offsetting trade is made on the initial position.

Forex futures are cash settled when they expire on set dates, normally on the second business day prior to the the third Wednesday in the following contract months. They are traded for a number of reasons, mainly because of the multiple sizes of the contracts, and they are a good tool both for early traders who want to negotiate small positions, and due to their high liquidity, for large scale traders which negotiate them to take on significant positions.

Forex markets offer a wide variety of currency futures contracts. The most famous and negotiated one is the EURUSD futures, but there are also E-Micro Forex Futures which allow traders to trade at 1/10th the size of regular currency futures contracts, or even more risky emerging market currency futures such as the ZARUSD and the RUBUSD ones. Contracts trade vary according to their degrees of liquidity, with daily volume spanning from the EURUSD contract (400K daily contracts) to emerging market contracts like the BRLUSD (33 contracts).

In forex markets contracts are traded via brokers, while futures are traded on exchanges that provide regulation in terms of centralized pricing and clearing. The market price for a currency futures contract does not depend on the broker. The CME Group, the largest regulated currency futures exchange in the world, offers 49 currency futures contracts with over $100B in daily liquidity. There are also smaller exchanges in which these contracts can be negotiated: NYSE Euronext, the Tokyo Financial Exchange (TFX) and the Brazilian Mercantile and Futures Exchange (BM&F) are the most famous.

Traders usually prefer markets with high liquidity since they provide a better opportunity for profiting and avoid emerging markets, which typically have very low volume and liquidity. The G10 contracts, the E-mini and the E-Micro contracts are the most heavily traded and have the greatest liquidity.

Currency futures, like any other futures contract, must specify the size of the contract, the minimum price increment, and the corresponding tick value. These specifications help traders to determine position sizing and account requirements, as well as the potential profit or loss for different price changes in the contract.

The EURUSD contract, for example, shows a minimum price increment of .0005, and a corresponding tick value of $10.00. This means that each time there is a .0005 change in price, the value of the contract will change by $50.00 with the sign dependent on the direction of the price change. For instance, if a long order is entered at 1.2000 and rises to 1.2005, the .0005 change is a $50.00 gain for the trader.

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