Home ›› 23 Mar 2023 ›› Editorial

Currency Futures

23 Mar 2023 00:00:00 | Update: 22 Mar 2023 22:57:38
Currency Futures

The global forex market is the largest market in the world with over US$5 trillion traded daily, according to Bank for International Settlements (BIS) data. The forex market, however, is not the only way for investors and traders to participate in foreign exchange. While not nearly as large as the forex market, the currency futures market has a respectable daily average closer to $100 billion.

Currency futures—futures contracts where the underlying commodity is a currency exchange rate—provide access to the foreign exchange market in an environment that is similar to other futures contracts.

Currency futures, also called forex futures or foreign exchange futures, are exchange-traded futures contracts to buy or sell a specified amount of a particular currency at a set price and date in the future. Currency futures were introduced at the Chicago Mercantile Exchange (now the CME Group) in 1972 soon after the fixed exchange rate system and the gold standard were discarded. Similar to other futures products, they are traded in terms of contract months with standard maturity dates typically falling on the third Wednesday of March, June, September, and December.

A wide variety of currency futures contracts are available. Aside from the popular contracts such as the EUR/USD (euro/U.S. dollar currency futures contract), there are also E-Micro Forex Futures contracts that trade at 1/10th the size of regular currency futures contracts, as well as emerging market currency pairs such as the PLN/USD (Polish zloty/U.S. dollar futures contract) and the RUB/USD (Russian Ruble/U.S. dollar futures contract).

Different contracts trade with varying degrees of liquidity; for instance, the daily volume for the EUR/USD contract might be 400,000 contracts versus 33 contracts for an emerging market like the BRL/USD (Brazilian real/U.S. dollar).

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. The CME Group offers 49 currency futures contracts with over $100 billion in daily liquidity, making it the largest regulated currency futures marketplace in the world. Smaller exchanges are present worldwide, including NYSE Euronext, the Tokyo Financial Exchange (TFX) and the Brazilian Mercantile and Futures Exchange (BM&F).

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.

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. The Euro/U.S. dollar contract, for example, shows a minimum price increment of .0001, and a corresponding tick value of $12.50.

investopedia.com

×