Speculation and hedging in currencies are achieved primarily through forex trading and futures contracts where the underlying asset is a particular currency. The value of a futures contract reflects expectations of the value of the currency when the contract expires, which is in contrast to the forex spot market where the values are based on current market values. There are several advantages to using currency futures rather than trading the currency in forex accounts:

• the futures exchange guarantees the transaction; thus, unlike in forex, there is no counterparty risk
• the futures market is more heavily regulated, so brokers are less likely to engage in fraud or other unethical behavior
• because all futures are traded on organized exchanges, there is much more price competition for orders, whereas in forex, the number of participants is much more limited on the electronic communications network that is used to trade forex orders, and even more limited if the broker is a dealing desk broker, where the forex traders are only trading with the broker, and no one else.

Another major advantage of futures is that, unlike FX contracts, which must be rolled over every business day, currency futures only need to be rolled over 4 times per year: March, June, September, and December. However, rolling over must be done by the trader, by offsetting the expiring contract with another futures contract that expires further in the future. Futures contracts, unlike FX contracts, are not rolled over automatically. CME Group, which lists most of the currency futures in the United States (US), publishes the official rollover date when traders are recommended to move their positions into the next contract month. The recommended date is 1 week prior to the official last trading day. However, it is better to rollover earlier when there is more liquidity. Volatility greatly increases in the last week before expiration.

In forex, interest rate differentials between a currency pair are either paid to the trader, if the trader is long on the currency with the higher interest rate, or the trader must pay the difference in interest, if short on the higher interest rate currency, every time a rollover occurs. Interest rate differentials do not apply to currency futures contracts. The only cost with rolling over a futures contract is the commission and the bid/ask spread, which is often only 1 tick.

Counterparty risk is greatly reduced because the exchanges generally require the brokerage firms to guarantee their brokers’ transactions, so if the client of a particular broker has a negative balance and does not repay, then the broker must make good on the transaction. If the client, broker, and the brokerage firm all default, then the exchange will cover the deficit.

These are the most commonly traded currencies:

• euro (EUR)
• Swiss franc (CHF)
• Japanese yen (JPY)
• British pound (GBP)
• US dollar (USD)
• Australian dollar (AUD)
• Canadian dollar (CAD)
• US dollar index (DX)

Currency Futures Contracts

Currency futures have 3 standard contract sizes. Except for the British pound, a full-size contract represents 100,000 to 125,000 units of currency, mini-contracts are half of the standard, and E-micro futures are 1/10 of the original futures contract size.

Most futures contracts are closed out before delivery, but if the contracts are held on the expiration date, then the short seller must make delivery and the long holder must take delivery of the underlying asset. However, some futures contracts are cash-settled. Contract expiration is the date and time for a particular delivery month of a currency futures contract when trading ceases and the final settlement price is determined so that the delivery process can start. Currency futures contracts listed by the CME Group, which is the main futures exchange for currencies, sets delivery on the 3^rd Wednesday of March, June, September, December, unless Wednesday is a holiday. The last trading day of CME currencies is on the 2^nd business day before the 3^rd Wednesday, which is usually the Monday before expiration, so the traders who do not wish to make or take delivery of the currency should exit their positions by the preceding Friday, if not earlier.

Contract Multipliers and Ticks

Almost all currency futures — except some e-micro futures and some lesser volume contracts — use the USD as the quote currency, which are called American quotations. The minimum change in value of a futures contract is the tick, equal to the contract size multiplied by the pip value of the currency. Ticks are always expressed in USD. Price changes in currency futures are calculated by multiplying the number of ticks by a constant multiplier, which is what a tick is worth in USD. The actual value of a tick will depend on the specific type of contract. Generally, the tick value for currency contracts varies, depending on contract sizes, which can range from Â¥12,500,000 to 62,500 British pounds, so it is easier to remember contract multipliers rather than sizes.

For most currencies, the tick value ranges from $10 to $12.50; however, it is $6.25 for the British pound. The euro, Swiss franc, and yen futures have the same tick value of $12.50. So, if the exchange rate for the euro is $1.4550 and it moves to $1.4451, then that is a single tick and the short trader will have lost $12.50 while the long trader will have gained the same amount. The euro and the Swiss franc contracts each represent 125,000 units of the underlying currency, but the yen futures contract represents 12,500,000 units, because the yen is roughly equivalent to a US penny. The yen futures contract quote of 1.2240 would mean that the price of the yen is actually 1.2240, so ¥100 would cost $1.224.

Some futures contracts, such as the yen and the Canadian dollar, are quoted inversely to the way they are generally expressed in forex. This is because futures contracts always use the dollar as the quote currency (American quotations); in forex, because of priority rules, the yen and the Canadian dollar are quoted with the dollar as the base currency rather than as the quote currency. So, futures contracts for the yen would be expressed as JPY/USD rather than the usual forex quote of USD/JPY. The resulting prices will, therefore, be inversely related.

Margin Requirements

To limit losses by clients, most FX trading platforms automatically liquidate client holdings as soon as their account balance drops below the margin requirements. Forex only has 1 margin requirement that applies to everyone at all times. In futures, however, there is an initial margin requirement that must be met when the account is opened. Afterward, the maintenance margin requirement, which is usually lower than the initial margin requirement, must be met at all times. There are also separate margin requirements for speculators and hedgers — speculators have higher margin requirements.

The National Futures Association (NFA) sets the leverage ratio for FX markets, but the margin requirements in futures markets are determined by the exchanges since they guarantee the trades. However, brokers will often have more restrictive requirements. Brokers will often adjust margin requirements, depending on market conditions. During fast-moving markets, margin requirements may increase significantly.

Futures accounts are marked to market every day, meaning that the net value of each account is determined at the end of the trading session, which for CME currency futures is 4 PM Central Standard Time. If an account increases in value, then margin is increased for that account — the increase is taken from accounts that have lost value. Because margin is increased or decreased daily, according to the account value, this margin is called variation margin.