What is the currency futures?

Currency futures is a type of contract in which two sides agree to exchange a specific quantity of a particular currency on a specific date at a pre agreed price. These are legally binding agreements and on expiry date, counter parties will have to deliver the amount on a delivery date at pre agreed price. They can also be used to hedge the currency risks or price speculations.

Specifications of currency futures are as follows −

• Parties to the contract.
• Size of contract.
• Position limitations.
• Spot and future prices.
• Margins requirements (initial, maintenance, variations margins).
• Market to market.

Formula to calculate the currency future is given below −

Currency future prices = spot rate * interest rate difference between currencies * time

Advantages

The advantages of currency futures are as follows −

• Margin requirements are more or less the same.
• Highly regulated market.
• No counterparty risk.
• Liquid market.
• No hidden cost.

Disadvantages

The disadvantages of the currency futures are as follows −

• Same party can have multiple future contracts due to low entry cost.
• For beginners, it may be complicated.
• No advantage of price increase.

Limitations

The limitations of currency futures are listed below −

• Contract size is standard.
• Sometimes, detailed analysis results in huge losses.