Currency futures trading is another term for foreign exchange futures. It involves a future contract that exchanges a certain currency for another. This happens at a set future date, at a fixed price based on the currency exchange on that set future date. The most common currency used is US dollar, which means that the future price is expressed in US dollars per single unit of the other chosen currency.
Currency futures trading is not for the timid nor common type of investor. It is for those who are able to step into the fast-paced world of trading, and are able to take greater risks in the future of currencies. It usually involves long-term investments where most of the contracts are delivered physically. Currency futures trading that are held at the end of the last trading day get paid using each currency involved. But, it can’t be avoided that most contracts tend to get closed out before the delivery date.
When does this kind of trading take place?
For those considered to be the most active when it comes to futures trading, this happens at four set dates in a year. It always happens on the third Wednesday of March, as well as June, September, and December.
What are forwards and where do they come from?
Forwards adjust the spot prices to make sure that they arrive at the set future date, and at the fixed delivery price. They come from the interest rate differentials and are not predictions of where spot prices will be in the future.
Basically, having these future contracts make it possible for investors to hedge their investment to avoid facing foreign exchange risks. By having the option to close out their position, they can step away from their obligation to trade currency before the set date of delivery.