Introduction
Currency futures are a trading instrument based on the underlying asset of the currency exchange rate, such as the exchange rate of the euro against the US dollar, or the exchange rate of the British pound against the US dollar. Currency futures are fundamentally similar to all other futures markets (futures markets on indices and commodities) and are traded in the same way.
Background of Currency Futures
Currency futures are based on the exchange rates of two different currencies. For example, the euro and the dollar (EUR/USD) are a pair of currencies with an exchange rate. The dominant currency is the first currency listed in the pair. In this case, traders are concerned with the exchange rate of the euro. Traders buy a contract at a specified value; the price of the contract moves up or down with the value of the euro.
Settlement, Delivery, and Profits
Currency futures are based on the exchange rate of the currency pair. They are settled in cash with the base currency. For example, the futures market for the euro against the dollar is based on the exchange rate of the euro against the dollar, with the euro being the base currency.
Futures Margins
The margin for currency futures should not be confused with the margin or leverage as it applies to stocks or the underlying currency market. Margin in currency futures (or any other futures contract) refers to the amount that must be in the trader’s account to open a trade for one contract. To trade a futures contract for the euro against the dollar, the broker might require the trader to have at least $2,310 to $3,000 in their account. Margins vary by currency broker (although the minimum is set by the exchange).
Popular Currency Futures
CME offers several well-known futures markets based on currencies, including the following: EUR – Euro vs. US Dollar contract, GBP – British Pound vs. US Dollar contract, CHF – Swiss Franc vs. US Dollar contract, AUD – Australian Dollar vs. US Dollar contract, CAD – Canadian Dollar vs. US Dollar contract, RP – Euro vs. British Pound contract, RF – Euro vs. Swiss Franc contract. Many other currency pairs are also available for trading via futures.
Conclusion
Currency futures are a centralized and regulated way to participate in currency market movements. Currency futures move in increments called “ticks,” with each tick having a value. The number of ticks gained or lost in a trade determines the profit or loss. To open a position in currency futures, the trader must have a specified minimum capital amount in their account, known as the margin. There are many currency futures that can be traded; specifications for each should be checked on the exchange’s website before trading.
Source: https://www.thebalancemoney.com/currency-futures-1031167
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