An Introduction Into Currency Futures

How Does a Currency Futures Contract Work?

A currency futures contract is an agreement to trade a set amount of one currency for that of another for a predetermined price in the future.

This is akin to locking in an exchange rate at a future date.

Below we have EUR/USD futures.

We can see that if we wanted to gain exposure to the Euro, we could simply buy a June Futures contract at a rate of 1.1965.

EUR/USD Micro Futures

us dollar future

Source: CME Group

If we buy the contract, we are locking in that exchange rate in the future. We will have to provide 1.

1965 Dollars for every Euro we receive.

As the days pass and the exchange rate changes our position will either make money (if the Euro increases in value against USD) or lose money (if it falls).

To put on this position, we only have to provide an upfront collateral of a few percent of the total position.

This is known as our maintenance margin. It allows us to trade a hundred thousand dollars of currency with as little as a few thousand dollars upfront.

Which Currencies Can I Trade?

There is a vast variety of currency futures available to the retail trader.

The majority of these are against the US Dollar due to its global currency status.

To name some of the most liquid there are the Euro, Swiss Franc, Aussie Dollar, Japanese Yen, Mexican Peso and Canadian Dollar.

In addition, we have futures which are not against the US Dollar which are known as crosses.

One popular one is the Euro/Swiss Franc cross as an example.

If there is no cross available, one can simply create one by buying one contract against the USD and selling the other against USD.

For example, to get a MXN/AUD cross one can buy a Mexican Peso Future while selling an Australian Dollar future.

Easy enough but one issue is the contracts are never the same size so it sometimes can be difficult to get equal exposures.

Using Currency Futures as a Hedging Tool

Currency futures can allow investors to reduce risk in their portfolios.

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