Currency Futures
Currency forward contracts are exchange-traded futures
contracts that are priced in a currency at which another currency can be bought
or sold at a later date. Forward exchange contracts are legally binding and the
counterparties that still hold the contracts on the expiration date must
deliver the currency amount at the specified price on the specified delivery date Forex trading platform in India.
Forward exchange contracts can be used to hedge other currency transactions or
risks or to speculate on price movements in foreign currencies.
Basics of Currency Futures
The first foreign exchange forward contracts were
established on the Chicago Mercantile Exchange in 1972 and is now the largest
foreign exchange forward market in the world.1 Currency forward contracts are
valued daily at market prices. This means that traders are responsible for
having enough capital in their account to cover the margins and losses that
arise after taking a position. Futures traders can waive their obligation to
buy or sell the currency before the contract delivery date. This is done by
closing the position. With the exception of contracts involving the Mexican
peso and the South African rand, forward foreign exchange contracts are
physically delivered four times a year on the third Wednesday of March, June,
September, and December.
For example, buying currency futures on euros on the US stock exchange at 1.20 means that the buyer agrees to buy euros at 1.20 US dollars foreign exchange market today. . If you let the contract expire, it will buy 125,000 euros at $ 1.20. Each Euro FX future on the Chicago Mercantile Exchange (CME) costs € 125,000, so the buyer should buy as much. On the other hand, the seller of the contract would have to deliver the euros and would receive US dollars.
Most participants in futures markets are speculators who
close their positions before the expiration date of futures contracts. They do
not provide physical currency. They make or rather lose money due to the change
in the price of the futures contracts themselves.
The daily profit or loss on a futures contract is recorded
in the trading account. This is the difference between the entry price and the
current futures price multiplied by the unit of the contract, which in the
example above is 125,000. For example, if the contract falls to 1.19 or rises
to 1.21, this means a profit or loss of $ 1,250 on a contract, depending on the
investor's side of the trade.
The price of currency futures are determined when the trade is initiated.
For example, buying a euro currency future on the US stock exchange at 1.20 means that the buyer agrees to buy euros at $ 1.20. If you let the contract expire, it will buy 125,000 euros at $ 1.20. Each Euro FX future on the Chicago Mercantile Exchange (CME) costs € 125,000, so the buyer should buy as much best broker in India for forex. On the other hand, the seller of the contract would have to deliver the euros and would receive US dollars.
Most participants in futures markets are speculators who
close their positions before the expiration date of futures contracts. They do
not provide physical currency. They make or rather lose money due to the change
in the price of the futures contracts themselves.
The daily profit or loss on a futures contract is recorded
in the trading account. This is the difference between the entry price and the
current futures price multiplied by the unit of the contract, which in the
example above is 125,000. For example, if the contract falls to 1.19 or rises
to 1.21, this means a profit or loss of $ 1,250 on a contract, depending on the
investor's side of the trade.
Difference Between Spot Rate and Futures Rate
The spot exchange rate is the currently quoted exchange rate at which one currency can be bought or sold in exchange for another currency. The two currencies involved are called "even". When an investor or hedger executes a spot exchange rate transaction, the currency exchange will take place at the time the transaction took place or shortly after the transaction about foreign exchange market you. Since forward exchange rates are based on the spot exchange rate, forward exchange transactions tend to change when exchange rates change.
When the spot rate of a currency pair increases, there is a
high probability that the futures price of the currency pair will rise. On the
other hand, if the spot rate of a currency pair falls, there is a high
probability that futures prices will fall. However, this is not always the
case. Sometimes the spot price can move, but futures contracts that expire at
distant dates may not. This is because the movement of spot prices can be seen
as temporary or short-term and therefore unlikely to affect prices in the
long-term.
Currency Futures Example
Suppose the hypothetical US company XYZ is exposed to high
currency risk and wants to hedge against the expected inflow of € 125 million
in September. Before September, the company was able to sell futures contracts
for the euros it will receive. Euro-FX-Futures has a contractual unit of
125,000 euros. They sell euro futures because they are an American company and
they don't need the euro. Now that they know they are receiving euros, they can
sell them and set a rate at which those euros can be converted into US dollars.
Company XYZ sells futures contracts of 1,000 euros to guarantee the expected receipt. As a result, if the euro depreciates against the US dollar, the expected receipt from the company is protected. They set their rate to be able to sell their euros at the rate they set. However, the company loses all the advantages that would derive from the appreciation of the euro. They are still forced to sell their euros at the price of the futures contract, which means that they are giving up the profit (relative to the August price) that they would have if they had not sold the contracts.
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