Currency Futures, Forex Futures
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Currency futures are legally binding contracts between buyers and sellers to buy or sell a specific sum of currency in exchange for another at a specified exchange rate. Delivery of the same is meant to take place on a specific future date. Currency futures are also known as forex futures or foreign exchange futures. Currency futures are traded in specialized futures exchanges.
Currency futures were developed after 1971, following the collapse of the Bretton Woods system of fixed exchange rates. The currency futures market is growing in popularity, as the main participants of this organized market comprise bankers, importers, exporters, multinational corporations and private speculators.
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Currency Futures and Futures Exchanges
Currency futures are traded according to the rules and regulations that are drawn by the futures exchanges. The trading can be done either on the floors of these futures exchanges or these exchanges can facilitate electronic trading for its members. The Chicago Mercantile Exchange is the world’s largest and most successful exchange for trading in currency futures, with offices in Chicago, New York, Washington, London and Tokyo.
Currency Futures as Standardized Contracts
Like all futures contracts, currency futures are standardized contracts too. The futures exchange sets the contract specifications. However, only the exchange rate can be negotiated by the buyers and sellers. The remaining specifications, such as defining the underlying currency, trading unit and delivery month, are set by the futures exchange.
The Use of Currency Futures
The currency futures market is also used by some companies for hedging. These companies either purchase currency futures for their future payables, or sell the futures on currencies for their future receipts. Speculators may also buy or sell futures on a foreign currency as a protection against the strengthening or weakening of the US dollar. So, speculators may be able to earn profit from the rise or fall of these exchange rates.
Risks of Currency Futures
Currency futures or forex trading are fraught with high levels of risk. A small unfavorable fluctuation in the exchange rate may result in loss of an investor’s entire deposit. Investors are advised to enter into this field only if they have in-depth knowledge of how risky this segment of financial market really is.
