Forex – The Global Giant
The global forex market is the greatest market in the world with over US$5 trillion traded daily, in accordance to Bank for International Settlements (BIS) data.1 The foreign exchange market, however, is no longer the solely way for traders and merchants to participate in foreign exchange. While now not nearly as large as the foreign exchange market, the currency futures market has a respectable day by day average closer to $100 billion.
Currency futures – futures contracts where the underlying commodity is a foreign money trade price – furnish get entry to to the overseas trade market in an surroundings that is similar to other futures contracts.
What Are Currency Futures?
Currency futures, also known as foreign exchange futures or foreign alternate futures, are exchange-traded futures contracts to purchase or promote a distinct quantity of a precise forex at a set price and date in the future. Currency futures were introduced at the Chicago Mercantile Exchange (now the CME Group) in 1972 quickly after the constant trade rate device and the gold popular were discarded.3 Similar to different futures products, they are traded in phrases of contract months with widespread maturity dates typically falling on the 1/3 Wednesday of March, June, September, and December.
Contract Types
A extensive range of foreign money futures contracts are available. Aside from the famous contracts such as the EUR/USD (euro/U.S. dollar currency futures contract), there are also E-Micro Forex Futures contracts that exchange at 1/10th the dimension of ordinary foreign money futures contracts, as properly as rising market foreign money pairs such as the PLN/USD (Polish zloty/U.S. dollar futures contract) and the RUB/USD (Russian Ruble/U.S. greenback futures contract).
Different contracts change with varying ranges of liquidity; for instance, the daily extent for the EUR/USD contract would possibly be 400,000 contracts versus 33 contracts for an emerging market like the BRL/USD (Brazilian real/U.S. dollar).
Currency Futures Exchanges
Unlike forex, whereby contracts are traded by way of currency brokers, currency futures are traded on exchanges that supply legislation in phrases of centralized pricing and clearing. The market charge for a foreign money futures contract will be exceedingly the equal regardless of which broking is used. The CME Group provides 49 currency futures contracts with over $100 billion in every day liquidity, making it the greatest regulated currency futures market in the world.2 Smaller exchanges are current worldwide, inclusive of NYSE Euronext, the Tokyo Financial Exchange (TFX) and the Brazilian Mercantile and Futures Exchange (BM&F).
Popular Contracts
Traders and traders are drawn to markets with high liquidity for the reason that these markets grant a better possibility for profiting. The emerging markets generally have very low volume and liquidity, and they will need to attain traction earlier than turning into aggressive with the other set up contracts. The G10 contracts, the E-mini and the E-Micro contracts are the most closely traded and have the greatest liquidity. Figure two (below) suggests some of the most popular foreign money futures contracts and their specifications.
Contract Specifications
Futures contracts, including currency futures, need to listing specs inclusive of the measurement of the contract, the minimal fee increment, and the corresponding tick value. These specifications assist merchants determine role sizing and account requirements, as nicely as the potential income or loss for one of a kind rate actions in the contract.
The Euro/U.S. dollar contract, for example, shows a minimum rate increment of .0001, and a corresponding tick value of $12.50. This indicates that each time there is a .0001 movement in price, the cost of the contract will alternate by using $12.50 with the fee structured on the route of the charge change. For instance, if a lengthy exchange is entered at 1.3958 and strikes to 1.3959, that .0001 charge cross would be worth $12.50 to the dealer (assuming one contract). If that identical long exchange moves to 1.3968, the fee go would be really worth $125.00 ($12.50 X 10 ticks or pips).
Settlement
There are two major strategies of settling a currency futures contract. In the sizeable majority of instances, shoppers and marketers will offset their authentic positions before the remaining day of buying and selling (a day that varies relying on the contract) by means of taking an contrary position. When an contrary role closes the exchange prior to the closing day of trading, a earnings or loss is credited to or debited from the trader’s account.
Less frequently, contracts are held until the maturity date, at which time the contract is cash-settled or bodily delivered, relying on the specific contract and exchange. Most currency futures are challenge to a bodily delivery method 4 times a yr on the 1/3 Wednesday at some point of the months of March, June, September, and December. Only a small proportion of foreign money futures contracts are settled in the physical transport of overseas trade between a customer and seller. When a currency futures contract is held to expiration and is physically settled, the fabulous change and the participant each have responsibilities to whole the delivery.
The CME, for example, is responsible for setting up banking facilities in the United States and in each united states represented by its foreign money futures contracts. These agent banks, as they are called, act on behalf of the CME and keep a U.S. greenback account and a overseas foreign money account to accommodate any physical deliveries. In addition, futures contracts do not exist directly between customers (for example, a customer and a seller). Instead, each participant has a contract with a clearinghouse, radically decreasing the hazard for consumers and dealers that a counterparty would fail to meet the terms of the contract.
Buyers (participants maintaining long positions) make arrangements with a financial institution to pay greenbacks into the International Monetary Market (IMM) shipping account, a division of the CME. The IMM is additionally the account from which agents (participants holding short positions) are paid. The transfer of overseas foreign money takes place similarly in other countries. Essentially, a participant’s turning in financial institution transfers the forex to the IMM delivery account, which then transfers the forex to the gorgeous account.
Oversight
Futures brokers, which includes these that provide currency futures, ought to follow regulations enforced by means of governing organizations inclusive of the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), as nicely as policies set forth through the exchanges. For example, the CME Group, the largest futures alternate in the world, ensures that self-regulatory responsibilities are fulfilled thru its Market Regulation Department, such as market integrity safety with the aid of keeping fair, efficient, competitive and obvious markets. Currency futures markets have a splendid deal extra oversight that the spot forex markets, which are at instances criticized for matters like non-centralized pricing and forex brokers trading against their clients.
Account Requirements
Currency futures are exchange-traded futures. Traders typically have bills with brokers that direct orders to the more than a few exchanges to buy and sell forex futures contracts. A margin account is commonly used in the buying and selling of currency futures; otherwise, a gorgeous deal of cash would be required to area a trade. With a margin account, merchants borrow cash from the dealer in order to vicinity trades, normally a multiplier of the genuine cash fee of the account.
Buying power refers to the quantity of cash in the margin account that is accessible for trading. Different brokers have varying necessities for margin accounts. In general, forex futures bills enable a as an alternative conservative diploma of margin (leverage) when compared to foreign exchange bills that can provide as a good deal as 400:1 leverage.5 The liberal margin prices of many foreign exchange money owed supply merchants the possibility to make outstanding gains, however more frequently suffer catastrophic losses.