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Traditional Futures vs Forex Futures

by Danijel
written by Danijel
Forex Futures vs Traditional Futures

Forex Futures vs Traditional Futures

It doesn’t take a genius to figure out that Forex futures and traditional futures are not quite the same thing. With Forex market being one of the largest financial markets in the world, and still growing at that, people might soon start writing about how to differentiate other futures from Forex futures.

Futures are traditional futures, right?                                               

Right. And wrong. Yes, both of them work pretty much the same way: you purchase a contract to buy or sell something. The transaction details are arranged in advance, and fixed. The price, date and quantity are all defined and agreed upon. Just one thing, though: traditional futures are traded on a centralized market, while Forex futures are not. The latter are traded on several exchanges which, even though they are not unified or over-the-counter, still retain some connections between them and there are some general rules that apply to all of them. That, and Forex futures only deal in currencies.

Forex futures

Forex futures deal in currencies rather than commodities and assets in a general sense. The aforementioned rules state that, when entering a futures contract, your broker is obligated to provide you the details of the transaction in advance, as well as to make sure you understood the implications. Even if that were not the case, it might behoove you to keep appraised of “small” details such as the size of your contract, its time period, trading hours, sample quote, ticks, exact prices and their limits as well as any other detail that might affect your bottom line. These are all important: the contract size determines the amount you need to pay, last trading day is the exact date when trading ceases, position limits determine how many positions can you own before you become obligated to provide info on your trading goals and strategy (and not just you, these rules apply to any and all) etc. Some of these elements are present in regular futures as well, while others are not.

Why do people use Forex futures?

Forex futures, like any other Forex derivative, are usually used for speculating and hedging purposes. Both are dealing with risk, albeit with different intent. Speculators welcome risk, as a means of turning a profit. They are well-suited for sudden changes and make most money on them. On the other hand, the whole purpose of hedging is to eliminate this very risk. Those who find current conditions agreeable will try to preserve them for as long as possible. This applies on traditional futures as well, although the possibility for abuse is higher in Forex futures.

Conclusion

Whether they are used to lock in profit or make use of the market’s volatility, both Forex and traditional futures are a common sight in today’s markets. They may be traded in different markets, under different conditions and yielding different profits and results, but the fact is: Forex futures are here to stay, and with markets going the way they are, they are here to stay.

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Analysis

Forex derivatives

by Danijel
written by Danijel
Forex knowledge, Forex derivatives

Forex knowledge

Forex derivatives are contracts whose value is decided by the prices of currency pairs they refer to. The most common Forex derivatives are forwards, futures, swaps and options. This article is the introduction to them.

Forwards

Currency forwards are legally binding contracts that pin the exchange rate of a currency on a future date with no down payment. The parties arrange the trade which is to be carried out at a later date; this can be very profitable for some, especially if the conditions change by the time the deal is realized. Currency forwards is only available to major players in the Forex markets, which makes them quite uncommon, so there is no need for a governing body. Because this type of contract is considered “private” (even though the parties are usually banks and corporations), any disputes are settled privately. The reason why major entities continue to use them is that they offer more favorable conditions than anywhere in the markets and the fact that the only ones capable of fulfilling such huge orders on a regular base are similar entities. The result is a very tight circle of low fees, favorable trading conditions, and reliable counterparties.

Futures

Futures are contracts that involve trading fixed amounts of currency under predefined conditions. Their simplicity, margin levels, and good reputation made them a common sight in Forex markets. These are essentially currency forwards on a small, standardized scale, meant for smaller players. Unlike forwards, they do require a down payment as a “proof of intentions”, and any “misunderstandings” are handled by a higher authority – the clearinghouse. Forex futures are binding for both parties, but there is always a way out. If fulfilling the contract is not an option, the trade can be canceled, under the conditions from the contract.

Forex Derivatives Options

Currency options are contracts between two sides: the writer and the holder. For a small fee, the holder acquires the right to trade currency at a fixed rate over a period of time, if they so choose. If not, the options expire worthlessly. Depending on the type of option, the writer commits to buying or selling a fixed amount of currency upon request from the holder, at the price stipulated in the contract, regardless of the spot rate.

Swaps

Swaps are agreements whereby one side exchanges cash flow with the other. Swaps are more similar to forwards than any other derivative: they are over-the-counter agreements between major players and the main point is to take advantage of different business conditions to mutual benefit, or to satisfy their commercial needs. Two parties agree to exchange different currencies, along with interest rates, Libor, and any other stipulations. In case of an emergency, a swap can be cancelled much like any other derivative: it is either traded away, or compensated under the terms from the contract. Or one side simply defaults, which is not recommendable.

In any case, Forex derivatives will each get due attention, in their own articles.

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