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What are Currency Futures?

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If you are trading in the forex market, you likely know that it is the largest trading market in the world based on volume. Did you know, though, that there is not only this market in which you can trade currency?  That's right, you can also trade in the currency futures market.

While not as large in terms of volume, currency futures still provide you access to trade forex, just from a slightly different angle. Here, we will explain all about this market, how you can get involved, and what type of assets you can trade here.

Introduction to Currency Futures

The first question you may ask is, what exactly are currency futures? In order to answer this, you first need to understand futures trading. Futures are basically contracts that are exchange-traded. Within these futures contracts, you agree to purchase an underlying asset at a certain point in the future for a set price. Your hope when trading futures is that the asset you agree to purchase in the future will have an improved price compared to that in the contract you purchased.

Currency futures are futures contracts traded where the underlying asset is the exchange rate of that currency. For example, you may purchase a EUR/USD future contract on the exchange. This means that at a set point in the future (if you let the contract expire), then you will receive $125,000 in Euro. Depending on the exchange rate at that future time vs what you had purchased the contract for, you may make a profit by allowing the contract to expire, and taking delivery of the $125,000 worth of Euro. In most cases, though, the futures contracts are regularly re-traded around the market.

Where to Trade Currency Futures

Many major forex brokers offer trading in spot forex (what we typically think of when we discuss forex trading) and currency futures. Futures are also offered with almost all full-service brokers.

However, when it comes to the markets you are trading in, this is when the major difference kicks in. Trading spot forex, is done through your broker on the decentralized forex market. Trading in currency futures is done through exchanges. The largest of these exchanges, and the place where currency futures were first introduced for trading in 1972, is the CME (Chicago Mercantile Exchange). Trading is offered on various other exchanges around the world as with most other futures markets.

Benefits of Using a Robo-Advisor

There are many benefits to using a robo-advisor, and these have hastened traders' adoption of such services. Here are a few of the most common.

People who Trade in Currency Futures

Anyone can start to trade in either the forex market, or the currency futures market so long as you have access. With that said, the futures markets in general are typically popular markets for many day traders. This also applies to the currency futures market.

In the example mentioned above, we look at what happens when your currency futures contract expires and you essentially take delivery of the currency you have bought in the contract. The reality though, is that this expiration rarely happens to traders. Instead, the contacts are re-traded on the exchanges as rates change and there is speculation on a daily basis. An example of such a rare case where many futures contracts expired could be seen in recent months when the price of oil futures went negative. This will have left many traders with expired contracts, having to take delivery of huge oil shipments, or trying to offload the contracts before expiry which led to the negative pricing.

Because of the trading nature of currency futures, you will also likely need access to a little more equity when it comes to startup costs than you would do if you were trading spot currency on the forex market.

Differences Between Forex and Currency Futures

There are several key differences you should be aware of when it comes to trading on the forex currency market and trading in currency futures. Here are a few of the major ones:

The Rate: The rate you will typically have when you are trading forex in the usual way if the spot rate. That is the rate at which the currency is valued right now. However, when trading currency futures, this rate will be the forward rate. The forward rate is typically different as it tries to factor in the price at a future date based on the futures contract. Therefore, you will notice that if the spot rate goes down, the forward rate will usually go down, and vice versa.

Leverage: When trading forex, you will typically have access to very high leverage. This could be up to 500 times your balance, depending on your location. This is not the case with currency futures trading, where leverage tends to be much lower and the equity requirement higher.

Commission: The fees and commissions that you have to pay if you are trading futures are typically quite a bit higher than those you may encounter trading forex. In fact, many forex brokers allow for commission-free trading. With futures trading though, there will be a commission involved.

Margin: Since currency future contracts are of a set value, usually around $125,000 per contract, then it is typical for them to be traded on margin. This means having a deposit of $2,500 or more, depending on the contract, and borrowing the rest from the broker. If the contract did expire, then you would have to honor the contract payment amount, whereas, with forex trading, many brokers will automatically close positions if your account equity is becoming negative.

Final Thoughts

If you are interested in trading currency, then the currency futures market offers another excellent alternative for you to think about beyond trading in the forex market. Generally, trading in the futures market of any assets tends to be a little riskier, and in the case of currency futures, you will need a bit more capital to get started. With some experience, though, particularly if you are interested in day trading, currency futures could be a good choice.

Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.