Forex futures

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Forex futures
Forex trade

Currency risk is a major concern for forex traders – one of only a handful in comparison to other financial markets, but a concern nonetheless. Combating or offsetting currency risk is therefore a major concern regarding forex transactions. Since forex futures is by far the most commonly used means of combating currency risk, it comes as no surprise that of all aspects of forex markets, the forex futures sector is the fastest growing. Not only do they hedge the risk of currency value fluctuations, but also enable shrewd forex traders to turn a profit on these fluctuations – a most desirable feature.

Forex Futures

Forex futures are essentially contracts between traders (or brokers, companies etc.) that specify the currency, its amount, price and a future date on which the trade will take place. One of their trademarks is the termination date; a point of time by which the trade will either take place under specified conditions or it will be made on the initial position. Another trademark is the ‘tick’ – the minimum price fluctuation. Ticks are unique to each type of futures contract, and very important to forex traders.

What helped forex futures contracts to become the norm is their standardization. They have universally defined sets of standards concerning dates, sizes, time frames, types of currencies and so on – which makes them quite convenient for traders looking to make a quick and safe trade without having to worry about leaving something out, losing time, or entering shaky business ventures. Standards make forex futures look like safe investments – a rarity on any market. As if being widely available and universally accepted contracts isn’t enough, forex futures come with an additional insurance against losses – a clearing house. Every forex futures exchange has one and all trades have to go through it for “clearance” – and to deposit the margin money that will cover the debit balance after each trade. The clearing house will convert profits and/or losses into hard currency and forward them to the account holder at the end of the day.

When it comes to margin, in futures market it is considered more of a proof of intentions and capability to carry out the contracts, rather than a borrowed sum meant to enable traders to buy/sell more than they otherwise could. This is why forwards margins are considerably lower (only 10 % of total sum). If it comes to it (the losses becoming severe enough), traders will receive ‘margin calls’ to deposit additional funds so they can keep trading.

Conclusion

Many traders have their own styles – some prefer quick trades, others hold on to their futures for extended periods of time. They prefer technical and fundamental analysis as well as macroeconomic factors, like most forex traders, all of which have their own deciding factors. Having said that, forex futures are about risk management but are not without risk themselves. Word to the wise – traders can and will get burned if they get careless.