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. 

 

 

RELATED TERMS
  1. Foreign Exchange Market

    The foreign exchange market is the forum in which traders can ...
  2. Forex - FX

    Forex is the market in which currencies are traded.
  3. Forex Account

    Opening a forex account is the first step to becoming a forex ...
  4. Forex Options Trading

    Forex options trading allows currency traders to realize gains ...
  5. Managed Forex Accounts

    A managed forex account is a type of forex account in which a ...
  6. Forex Broker

    A forex broker is a service firm that offers clients the ability ...
Related Articles
  1. Investing

    Getting Started In Foreign Exchange Futures

    Learn how these futures are used for hedging and speculating, and how they are different from traditional futures.
  2. Investing

    Currency Futures: An Introduction

    Find out why forex market is not the only way for investors and traders to participate in foreign exchange.
  3. Trading

    Forex or Stock Trading: Which Works For You?

    Even though the odds favor stock trading, forex trading has several advantages to offer a particular type of investor.
  4. Trading

    Economic factors that affect the forex market

    Keep pace in the competitive and fast-moving foreign exchange (forex) markets by knowing the economic factors and indicators to watch.
  5. Trading

    Forex trading: A beginner's guide

    Foreign exchange is the act of changing one country's currency into another country's currency for a variety of reasons, usually for tourism or commerce.
  6. Trading

    The Pros And Cons Of Trading Forex In An Overseas Account

    The Dodd-Frank Act of 2010 could impact whether overseas accounts benefit FX investors.
RELATED FAQS
  1. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  2. How do you make money trading money?

    Trading money, particularly in the forex market, is a speculative risk, as you are betting that the value of a currency will ... Read Answer >>
  3. How do you Fund a Forex Account?

    Forex traders are usually given several options when deciding how to deposit funds into trading accounts, learn how and what ... Read Answer >>
  4. How does the foreign exchange market trade 24 hours a day?

    Because foreign currencies are in high demand, the forex market is open 24 hours a day, and trading is not done at one central ... Read Answer >>
Trading Center