One derivative of this market is the forex futures market, which is only one one-hundredth the size. This article examines the key differences between forex futures and traditional futures and looks at some strategies for speculating and hedging with this useful derivative.
Traditional Futures Both forex and traditional futures operate in the same basic manner: There is, however, one key difference between the two: The vast majority of forex futures are traded through the Chicago Mercantile Exchange CME and its partners introducing brokers. However, this is not to say that forex futures contracts are over-the-counter per se; the futures are still bound to a designated 'size per contract' and are offered only in whole numbers unlike forward contracts.
It is important to remember that all currency futures quotes are made against the U. Futures Fundamentals Here is an example of what a forex futures quote looks like: Euro FX Futures on the CME For any given futures contract , your broker should provide you with its specifications, such as the contract sizes, time increments, trading hours, pricing limits and other relevant information.
Here is an example of what a specification sheet might look like:. Speculating Hedging and speculating are the two primary ways in which forex derivatives are used.
Hedgers use forex futures to reduce or eliminate risk by insulating themselves against any future price movements. Speculators , on the other hand, want to incur risk in order to make a profit. Now, let's take a more in-depth look at these two strategies. Hedging There are many reasons to use a hedging strategy in the forex futures market. One main purpose is to neutralize the effect of currency fluctuations on sales revenue.
For example, if a business operating overseas wanted to know exactly how much revenue it will obtain in U. Spotting A Forex Scam When hedging, traders must often choose between futures and another derivative known as a forward. There are several differences between these two instruments, the most notable of which are these: This allows you to tailor the contracts to your needs instead of using a set contract size futures.
By using futures, you have the ability to re-evaluate your position as often as you like. With forwards, you must wait until the contract expires. Speculating Speculating is by nature profit-driven. In the forex market, futures and spot forex are not all that different. So why exactly would you want to participate in the futures market instead of the spot market? Well, there are several arguments for and against trading in the futures market: The strategies employed for speculating are similar to those used in spot markets.
The most widely used strategies are based on common forms of technical chart analysis since these markets tend to trend well. These include Fibonacci studies, Gann studies, pivot points and other similar techniques. Alternately, some speculators use more advanced strategies, such as arbitrage. The Bottom Line As we can see, forex futures operate similarly to traditional stock and commodity futures. There are many advantages to using forex futures for hedging as well as speculating.
The distinguishing feature is that the futures are not traded on a centralized exchange. Forex futures can be used to hedge against currency fluctuations, but some traders use these instruments in pursuit of profit, just as they would use futures on the spot market.
Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance.
Become a day trader. Forex Tutorial Forex Futures Vs. Here is an example of what a specification sheet might look like: Specification Sheet from CME. Forex Walkthrough Speculating Speculating is by nature profit-driven. How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage.
The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...