Currency Futures

Currency Futures Definition

Currency Futures Contracts are similar to futures contracts that exist for commodities , invest-bearing deposit, and gold. They are contracts that specificising a standard volume of a particular currency to be exchange at a specific date and at specific price. Being standardized contracts they have to respect the following contract specifications:

• Maturity date: usually Futures currency contract mature on the third Wednesday of January, March, April, October and December. However, the point is that the maturity date is standardized and cannot be not tailored.

• Size of the contract: There is a specific size for each specific Currency , and trading must be done in the given multiple of that size.

• Counter-party : This is an important characteristic of Future Currency. Unlike Forward currency contract, Future Currency are agreements between the client and the exchange clearing house. Thus, the clearing house is the guarantee for the investor that the counter-party will not fail to honour the agreement. In the next pages will analyse more specifically how is guaranteed the credit risk of a currency futures.

• Commission : Differently from the interbank market , where dealers trading using bid and ask price without charging commission, in the currency futures market investors should pay a commission to brokerage firms for their executions. The “ brokerage fee” , as it is called, is the result of the spread between bid and ask price. That is, the brokerage firm buys a future contract for a price and sells the same contract for a slightly higher price, the difference between bid and ask price is the cost of transaction ( or brokerage fee).

• Marking to market : as I will say subsequently, future currency markets operate in a daily basis , that means the value of the contract and the respective positions ( short and long position) are calculated in any given day. Basically, the reason for the use of the daily basis is the...