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A currency future, also known as an FX future or a foreign exchange future, is a
futures contract In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
to exchange one
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general ...
for another at a specified date in the future at a price (
exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...
) that is fixed on the purchase date; see
Foreign exchange derivative A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rates of two (or more) currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange ri ...
. Typically, one of the currencies is the
US dollar The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
. The ''price'' of a future is then in terms of US dollars per unit of other currency. This can be different from the standard way of quoting in the spot
foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
s. The ''trade unit'' of each contract is then a certain amount of other currency, for instance €125,000. Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each currency. However, most contracts are closed out before that. Investors can close out the contract at any time prior to the contract's delivery date.


History

Currency futures were first created in 1970 at the International Commercial Exchange in New York. But the contracts did not "take off" because the
Bretton Woods system The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretto ...
was still in effect. On 15 August 1971, President
Richard Nixon Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was ...
abandoned both the
gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from th ...
and the system of
fixed exchange rate A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another ...
s. Some commodity traders at the
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an ...
(CME) did not have access to the inter-bank exchange markets in the early 1970s, when they believed that significant changes were about to take place in the currency market. The CME established the
International Monetary Market The International Monetary Market (IMM), a related exchange created within the old Chicago Mercantile Exchange and largely the creation of Leo Melamed, was one of four divisions of the CME Group (CME), the largest futures exchange in the United Sta ...
(IMM) and launched trading in seven currency futures on May 16, 1972. The CME actually now gives credit to the International Commercial Exchange (not to be confused with ICE) for creating the currency contract, and state that they came up with the idea independently of the International Commercial Exchange. Today, the IMM is a division of CME. In the fourth quarter of 2009,
CME Group CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset clas ...
FX volume averaged 754,000 contracts per day, reflecting average daily notional value of approximately $100 billion. Currently most of these are traded electronically. Other
futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity o ...
s that trade currency futures are Euronext.liffe and
Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russ ...
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Terms

For currency futures traded on the CME the conventional maturity dates are the IMM dates, namely the third Wednesday in March, June, September and December. The conventional option maturity dates are the first Friday after the first Wednesday for the given month. More recently, serial months have been added. For instance, EUR/USD terms are now 20 consecutive quarters (5 years) plus 3 serial contract months.


Uses


Hedging

Investors use these futures contracts to
hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoi ...
against foreign exchange risk. If an investor will receive a cashflow denominated in a foreign currency on some future date, that investor can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cashflow. For example, Jane is a US-based investor who will receive €1,000,000 on December 1. The current exchange rate implied by the futures is . She can lock in this exchange rate by selling €1,000,000 worth of futures contracts expiring on December 1. That way, she is guaranteed an exchange rate of regardless of exchange rate fluctuations in the meantime.


Speculation

Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. For example, Peter buys 10 September CME Euro FX Futures for €1,250,000 (each contract worth €125,000), at . At the end of the day, the futures close at . The change in price is . As each contract is over €125,000, and he has 10 contracts, his profit is . As with any future, this is paid to him immediately. More generally, each change of (the minimum
Commodity tick Futures exchanges establish a minimum amount that the price of a commodity can fluctuate upward or downward. This minimum fluctuation (trade increment) is known as a tick or commodity tick. Hence, a tick is any fluctuation in the price of a security ...
size), is a profit or loss of per contract.


See also

*
List of finance topics The following outline is provided as an overview of and topical guide to finance: Finance – addresses the ways in which individuals and organizations raise and allocate monetary resources over time, taking into account the risks entailed ...
*
Forward contract In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivat ...
*
Foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
*
Foreign exchange derivative A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rates of two (or more) currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange ri ...
*
Currency swap In finance, a currency swap (more typically termed a cross-currency swap, XCS) is an interest rate derivative (IRD). In particular it is a linear IRD, and one of the most liquid benchmark products spanning multiple currencies simultaneously. ...


External links

* Quandl
Currencies Futures
- free, historical data in CSV, Excel, JSON or XML
Currency Futures Contract Specifications and Tick Values
at ExcelTradingModels.com


References

{{DEFAULTSORT:Currency Future Derivatives (finance) it:Future#Currency future