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Today’s blog focuses on FX futures and provides a detailed insight into the current market situation and future outlook for the currency. Before you delve into the future, we first take a brief overview of what you should know. In this blog, we will discuss the basics of currency futures so that you can consider adding them to your investment portfolio.
As we have discussed before, currency futures can be used to do two things: hedge your risk by buying or selling them. Traders buy FX futures because they expect the currency to appreciate and try to profit from exchange rate fluctuations. The same could be said for a trader who expects the euro to appreciate against the dollar and decides to buy a EUR- USD futures contract. If the Euro / USD price continues to rise as originally expected, you can buy additional forward contracts in Euro currency to cover the first future contract, and vice versa.
In addition to buying and selling currency pairs, options in currency futures offer contract holders the opportunity to purchase forward contracts for a particular currency pair or to buy and sell options on that currency pair. Similar to commodity futures transactions, currency forward options also enable the buyer of the contract to complete a transaction at a future date on the basis of the currently agreed price. FX futures contracts can be guaranteed when you “buy” a currency, but not when you “sell” it.
FX futures can be bought by a party who knows that they will need foreign currency at some point in the future but do not want to buy it at that point. Forex futures contracts are traded strategically and, as the futures trader expects an actual payment at a later date, he wants to hedge his current exposure to the spot market.
In a broader sense, two distinct types of foreign exchange are distinguishable: spot forex trading and futures trading, the latter being a popular form of foreign exchange derivatives. Forex futures contracts are standardized, standardized and customized and traded on a central exchange. Euro FX futures are therefore a exchange traded contract that represents the ability to receive and deliver a certain amount of euro at an already agreed exchange rate. The futures, which are very similar in currency, are in a wide range similar to so-called “spot” and “forex” futures trading, but differ in that they are traded in different currencies.
However, there are futures contracts that are agreed by one currency and can be traded in exchange for another currency on the basis of an already agreed rate. These forward contracts are called “forward contracts” because the agreement is binding to buy or sell the underlying asset. If a trader wants to make profits or avoid further losses, an FX futures contract can only be concluded by using a trade that represents the opposite position to the original trade.
If a trader owns stocks that are located in different countries and whose earnings and profits respond to changing foreign exchange rates, he can use forward foreign exchange to protect against the downside risk that these stocks might face if certain currencies depreciate in value. Secondly, one can speculate that the future spot price will be different from the futures price of the listed currency and try to profit from the price difference. When an investor makes a forward forecast contract, a small change in the price of the underlying asset can yield big results.
There are many foreign exchange futures contracts to trade and you should check the specifications of each one on the exchange website before you trade one. FX futures are derivative contracts where the price at which a currency can be bought or sold changes, but the contract also sets a specific date on which transactions can be made. These derivative contracts are also referred to as futures options, depending on whether you buy or sell the counter or denominator of the currency pair. Read our article on futures trading and how totrade futures work and how the different types of derivatives work.
Currency futures can be used to hedge against other transactions and currency risks or to speculate on the price development of a currency.
Euro FX futures allow traders to value the euro’s ability to manage the risk of currency depreciation against other currencies, such as the US dollar. The futures contracts traded on the CME and the FX Futures Exchange (FXE) are designed to reflect changes in the value of currencies and their exchange rates among themselves and against the US dollar and other major currencies. FX futures allow a wide range of trading options, from short-, medium- to long-term contracts.
USD uses a quote for each currency, which is called an “American quote,” and there is a tendency to quote vice versa, as it is generally expressed in foreign exchange. A futures contract for the yen, for example, would reflect the US dollar’s exchange rate against the euro and other major currencies, and vice versa.