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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.
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