The concept of currency futures is relatively simple and involves attempting to make a successful prediction about the future price of a currency pair.
If you are interested in investing in forex and would like the opportunity to make money from these markets, here is a look at some of the key points that you need to know currency futures.
How it works
In basic terms, currency futures (which are also referred to as forex futures) consist of a contract that is traded involving a chosen currency pair, that will then be exchanged for delivery on a pre-determined future date.
The trader has the option to close out the trade before the maturity date is reached and this will involve the physical delivery of the currencies through a recognised exchange.
Currencies are traded in pairs and you will probably be familiar with the financial summaries that compare the pound against the dollar and other recognised pairs.
When you are forex trading, currency futures will involve using your judgment to determine whether your chosen currency will either rise or fall against the other, and you strike your bet accordingly in the hope that the price moves favourably in line with your prediction.
The global FX market is the largest financial market in the world with an average of $4 trillion traded on a daily basis, and the currency futures market offers investors an alternative way of speculating on the movement of currency prices.
There are a wide variety of currency futures contracts available and there is the opportunity to specialise in more niche currencies as well as the ever-popular EUR/USD and the like. You could for example place a futures trade in an emerging market currency pair such as the Polish Zloty against the U.S Dollar (PLN/USD).
Many new investors tend to stick with more familiar markets whilst they are learning how to make regular profitable trades and the varying degrees of liquidity in lesser known currency pairs can also be an issue when you are trying to secure a profitable position or close your trade.
All futures contracts including currency futures are required to list a number of specifications, including the size of the contact, the minimum price increment and also the resultant tick value.
Having these specifications on the contract provide the trader with the opportunity to determine position sizing and account requirements. It also enables then to calculate the potential profit or loss for different price movements that occur in the contract.
Having this data to hand will give you the chance to calculate the potential profit per tick movement.
Settling the contract
There are two principal methods involved in settling a currency futures contract.
By far the most popular method, that is adopted by the majority of traders, is to offset their original positions before the last day of trading by taking an opposite position. By taking this opposite position, a profit or loss is then debited or credited to your account.
The other option is to hold the contract until the maturity date, at which time the contract is cash-settled or physically delivered.
Forex and currency futures do certainly offer traders a distinctive vehicle with which to hedge or speculate. Learning as much as you can about how these markets work, may potentially allow you the chance to increase your profits as your knowledge and experience grows.
Archie Quinn admits he is passionate about Forex futures and trading. Whenever he can, he loves to sit down and share his insights on the Forex market. You can read his posts on many blog sites today.