Currency Futures

Every country has a currency, and the value of that currency changes all the time in relation to other currencies. The value of a country's currency is determined by a variety of factors, including the status of the economy, foreign exchange reserves, supply and demand, and central bank policy. Investors are attracted to a currency that is stable and strong. NSE Currency futures can be used to do this.

Currency futures are a forex futures trading instrument with a currency future exchange rate as the underlying asset, such as the euro to US dollar exchange rate or the British Pound to US dollar exchange rate. Currency futures are fundamentally the same as all other futures markets (index and commodity futures markets) and are traded in the same manner.

What are Currency Futures?

Currency futures are based on two different currencies' exchange rates. The euro and the dollar (EUR/USD) are an example of a currency pair with an exchange rate. The first currency indicated in the pair is the governing currency. 

Futures dealers are concerned about the euro price in this situation. Traders purchase a contract for a specific amount, and the contract's value fluctuates with the value of the euro.

Currency futures only trade in one contract size, so traders must trade in multiples of that. 

Features of Currency Futures

Mentioned below are the key attributes of currency futures prices:

  • Underlying Asset: This is the currency exchange rate that has been specified.
  • Expiration Date: This is the final settlement for cash-settled futures. It is the date on which the currencies are exchanged for physically delivered futures.
  • Size: The sizes of contracts are all the same. 
  • Margin Requirement: An initial margin is necessary to enter into a futures contract. A maintenance margin will be established, and if the original margin goes lower than this level - a margin call will occur, requiring the trader or investor to deposit money in order to raise the initial margin over the maintenance margin.

Importance of Investing in Currency Futures

Like other futures - foreign exchange futures can be utilized for hedging or speculative objectives. FX futures are purchased by a party who knows they will require foreign currency in the future but does not want to buy it now. 

This will function as a hedge against any potential exchange rate volatility. They will be assured of the FX futures contract's exchange rate when the contract expires, and they need to acquire the currency.

Similarly - if a party anticipates receiving a cash flow in a foreign currency in the future, they might use futures to hedge their position. 

Speculators frequently use currency futures as well. If a trader believes a currency would appreciate against another. He or she might buy the FX futures contracts to profit from the fluctuating exchange rate. Because the initial margin retained is typically a fraction of the contract size, these contracts can be beneficial to speculators. This effectively allows them to leverage up their position and increase their exposure to the exchange rate.

Interest rate parity can also be checked using currency futures. If interest rate parity does not hold - a trader may be able to earn solely on borrowed funds and the utilization of futures contracts by employing an arbitrage technique.

Due to the opportunity to modify these over-the-counter contracts, currency forwards is frequently used by investors wishing to hedge a position. Currency futures are popular among speculators because of their high liquidity and ability to leverage their positions.

Settlements of Currency Futures

A currency futures contract can be settled in one of two ways. The vast majority of the time, buyers and sellers will take an opposing position to offset the original positions before the last day of trading (which varies depending on the contract). The profit/loss is credited to or debited from the investor's account when an opposite position closes the trade before the last day of trading.

Contracts are typically held until the maturity date, after which they are either cash-settled or physically delivered, depending on the contract and exchange. The physical delivery of most currency futures takes place four times a year, on the third Wednesday of March, June, September, and December.

Only a small percentage of currency futures transactions are completed by a buyer and seller physically delivering foreign money. When a currency futures contract is kept until it expires and is physically settled, both the applicable exchange and the participant are responsible for completing the delivery.

 

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