Investing in Currency Futures

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Futures are standardized forward contracts traded in stocks. They are a uniform term financial instruments with which parties agree to exchange a certain amount at maturity of particular financial assets at a set price.

Or in the case of index futures, to liquidate a sum of money equal to the difference between the value of the reference to the signing of the contract and the value of that index on the expiry date.

The FX futures contract is designed for the exchange of one currency for another at a designated date in the future on the basis of a fixed price (exchange rate). The majority of contracts undergo physical delivery, which means those possessed at the end of the last trading day, the relevant payments are rendered in each currency.

Even though, most contracts are finalized before that stage, investors have the capacity to finalize the contract at any point before the delivery date. In general, futures contracts related instruments are standardized whose elements of the contract are defined in a standard contract, and the counter-parties can not change it.

A currency futures contract typically exchanges currencies, for example if a currency is in Euro (€ or EUR) or U.S. dollar (U.S. $ or USD). The futures price is then expressed in Euros (or USD) per unit of the currency. But this may change according to the standard mode of quotation in the foreign exchange market. The unit of trading of each contract is a given amount of foreign currency.

Investors make use of such contracts to manage the risks synonymous with currency fluctuations, and they are also in a position to utilize them for speculative purposes. The currency futures originated from the Chicago Mercantile Exchange (CME) in 1972, it was roughly one year following the abandonment of the concept of fixed exchange rates together with the gold standard.

In the event that an investor is set to obtain a cash flow denominated in a particular foreign currency at a future date. The investor is in a position to seal in, the current exchange rate by embarking on an offsetting currency futures position which runs out on the cash flow date. You can also use currency futures to speculate and, in the main endeavor to gain from the fluctuation of exchange rates.

The International Monetary Market (IMM) was established for trading in seven currency futures in 1972. This was because a number of commodity traders at the CME, were disgruntled by the lack of access to the inter-bank exchange markets. And were convinced that significant changes were imminent in the currency market, and up to this day.

The IMM is still going strong with FX volumes averaging 754,000 contracts per day, indicating an average daily notional value of about $100 billion. There are several other futures exchanges which trade FX futures and they include Tokyo Financial Exchange and the Intercontinental Exchange.

 

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