Definition of Currency Futures Contract
A currency futures contract is a standardized contract in which the buyer agrees to buy, and the seller agrees to sell a specific currency at a predetermined price on a predetermined future date.
The amount of the underlying currency, the delivery date, and the exchange rate are all specified in the futures contract. Currency futures contracts are traded on venues like the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).
Definition 2
A currency futures contract is an agreement between a buyer and a seller of foreign currencies that promises delivery of a stipulated currency at a specified price on a specific date in the future.
More Thorough Understanding of the Term
Currency futures contracts are financial products that enable market players to buy or sell a specific amount of a currency at a future price and date. These contracts are standardized and exchanged on exchanges like the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).
Currency futures contracts are utilized by market players to hedge against exchange rate risk, which is the risk of a negative change in the exchange rate between two currencies before a transaction is concluded.
The size of currency futures contracts is determined by the exchange on which they are traded. A basic CME currency futures contract, for example, is for 125,000 units of the underlying currency. The contract defines the delivery date, the date by which the seller must provide the underlying currency, and the buyer must pay for it.
Most futures contracts, however, are not kept until delivery. Instead, they are bought and sold in the market, with daily earnings and losses determined by the difference between the purchase price and the current market price.
Why Use Currency Futures Contracts?
Market participants utilize currency futures contracts to hedge against exchange rate risk.
For example, if a corporation in the United States anticipates receiving payment in euros in six months, it can sell euro futures contracts now to lock in the currency rate. If the euro falls in value versus the US dollar during the next six months, the corporation will have locked in a favorable exchange rate and reduced its exposure to currency fluctuations. In contrast, if the euro strengthens against the US dollar during the next six months, the corporation will have locked in an unfavorable exchange rate while reducing its exchange rate risk.
In Sentences
- Currency futures contracts can help you manage exchange rate risk.
- Traders can lessen the uncertainty of future cash flows by hedging their exposure to exchange rate risk.