Currency Futures

A currency future is a contract that details the price at which a currency could be bought or sold, and sets a specific date for the exchange.

A currency future is known as an FX future or foreign exchange future.

This type of foreign exchange derivative sets the price at which one currency will be exchanged for another at a specified date in the future.

Currency futures are one of the instruments used to hedge against currency risk.

They are highly regulated, and any counterparty still holding the contract at the expiration date is legally bound to take delivery of the currency on the given date and at the given price.

What is the difference between spot and futures prices?

A futures price differs from a spot price as it is not based on current market value, but a potential market price in the future.

If traders have open positions on a spot currency rate, they may use a currency futures contract to hedge.

What is the difference between currency futures and currency forwards?

Both currency futures and currency forward contracts are financial derivatives that allow people to buy and sell currency pairs at a specific time and at a given price.

Though they are similar in nature, they operate with a few key differences:

Currency futures are…	Currency forwards are…
Traded on an exchange	Traded over-the-counter
Highly standardized transactions with legally binding terms and conditions	Privately negotiated and specific to individual traders needs

The main difference between a currency future and a currency forward is that futures are traded through a central market, whereas forwards are over-the-counter contracts (private agreements between two counterparties).

The risk of default on futures contracts is virtually zero as they always involve a central clearinghouse, whereas forwards always carry the risk of counterparty default. Some providers require client collateral in order to cover this risk.

A forward contract sets a rate with an expiry date. A futures contract establishes a daily market (mark-to-market) rates, and the daily price differences are settled or included daily in the contract until it ends.

A futures contract is normally a speculative product for investors, while forwards are more commonly used by companies seeking to protect themselves against currency volatility.

Related Terms

Currency Forward

A currency forward is an agreement that locks in an exchange rate the day on which the agreement is signed for a transaction that will be completed later.

Forwards

A forward contract involves an agreement between two parties to buy or sell an underlying asset at a predetermined price on a specified future date.

Forex (FX)

Forex stands for “foreign exchange” and refers to the buying or selling of one currency in exchange for another. While it is called “foreign” exchange, this is just a relative term. The terms “foreign” and “domestic” are relative to the person using the term. What is foreign to someone is considered domestic to another. “Currency exchange” […]

Futures

A futures contract is a type of financial derivative that obligates the buyer to purchase an underlying asset at a specified price and on a specified future date

Perpetual Futures

Perpetual futures are a type of derivative contract that allows traders to speculate on the future price of an underlying asset without an expiration date.