What is this little baby all about then?
It’s a standard contract for set amount of currency at a set date
It is a market traded forward rate basically
*Calculations of how these work are required only for P4 exam (not F9)
When a currency futures contract is bought or sold, the buyer or seller is required to deposit a sum of money with the exchange, called initial margin.
If losses are incurred as exchange rates and hence the prices of currency futures contracts change, the buyer or seller may be called on to deposit additional funds (variation margin) with the exchange
Equally, profits are credited to the margin account on a daily basis as the contract is ‘marked to market’.
Most currency futures contracts are closed out before their settlement dates by undertaking the opposite transaction to the initial futures transaction, ie if buying currency futures was the initial transaction, it is closed out by selling currency futures. A gain made on the futures transactions will offset a loss made on the currency markets and vice versa.
Lower transaction costs than money market
They are tradeable and so do not need to always be closed out
Cannot be tailored as they are standard contracts
Only available in a limited number of currencies
Still cannot take advantage of favourable movements in actual exchange rates (unlike in options…next!)