The Concept of Forex Futures
When the Forex traders and investors trade in the Forex market, Forex Futures provide an interesting alternative to straight cash Forex. Forex futures, like any futures, are standardized contracts that are traded on a regulated exchange, during fixed trading hours, which is unlikely in a 24-hour round-the-clock trading and cleared by a central counterparty. Unlike cash Forex, which is usually traded at a “spot” price (i.e. the current exchange rate), Forex futures are traded at a probable future price (i.e. the expected exchange rate on the exchange-determined settlement date).
The settlement date in Forex market is not the only thing determined by the exchange. The exchange also makes the rules regarding trading hours, contract sizes, how the contract is to be settled on the settlement date and how much money the Forex traders need to deposit for each position they have open. The biggest Forex futures exchange is the CME, or the Chicago Mercantile Exchange but there are also other similar exchanges around the world. So what are the advantages and disadvantages of trading Forex futures versus trading cash Forex.
Firstly there are the downsides. When trading Forex futures, you have to keep a larger deposit with your broker than you typically would when trading cash Forex. This is because futures are leveraged. When you buy a Forex future, you are actually taking out a contract to buy a prearranged amount of currency at a future date. So if the price moves against you, you will not only lose that deposit but also have to pay additional deposit or the maintenance margin as long as your position is open.
The trader is also limited to trading during the exchange trading hours. So if there is a big movement in the markets while the exchange is closed, you also have to wait until the exchange opens before you can close your position. And you have to also pay commissions to your broker and fees to the exchange when trading futures, whereas with cash Forex, you only pay the dissimilarity between the bids and ask spread. But there are some upsides as well.
Returning back to the issue of leverage, if the markets move in your favor, you can make a lot more than you would on the cash market. You should bid spreads that are generally lower for futures than they are for cash. The risk of the opposition is reduced because all trades are cleared through the central clearing house and the standardized contract terms make the procedure of hedging cash positions much easier. So in conclusion, Forex futures are not for everyone but can provide advantages over the cash markets. Whatever you decide to trade, try not to risk more than you can afford to lose!
