What is the currency futures?

Finance ManagementBanking & FinanceGrowth & Empowerment

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.
raja
Updated on 18-May-2022 08:10:42

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