DEFINITION of Forex Futures
A forex future is an exchange-traded contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future. All forex futures are written with a specific termination date, at which point delivery of the currency must occur unless an offsetting trade is made on the initial position.
The price of the futures contract is based off the underlying asset: the forex rate.
BREAKING DOWN Forex Futures
Forex futures serve two primary purposes as financial instruments. First, they can be used by companies or sole proprietors to remove the exchange-rate risk inherent in cross-border transactions. Second, they can be used by investors to speculate and profit from currency exchange-rate fluctuations.
The different between forex and forex futures is that with forex trading the two parties exchange the different agreed currencies, whereas forex futures are a derivative contract that expires on a set date (March, June, Sept, Dec), and are cash settled on expiry.
Forex futures are traded for a number of reasons. Firstly, because of the various size of the contracts they are a good tool for early investors who want to trade smaller positions, and conversely, because they are liquid, large scale investors will use them to take on significant positions.
Forex futures can also be hedging strategies for companies who have upcoming payments in foreign exchange. For example if a U.S. company has agreed to buy an asset from a European company with payment at a future date they may buy some euro forex futures to hedge themselves from an unwanted move in the underlying asset: the EUR/USD cross rate.