Forex futures contracts are a popular trading derivative. As one of the most liquid trading instruments, FX futures are frequently used by traders to dampen the downside of exchange rate movements. Here we explain what forex futures are, why they are useful and how to trade them. We also highlight the differences between the heavily regulated UK futures market and decentralised spot forex.
Brokers with Forex Futures
Forex Futures Explained
Forex futures are contracts to buy/sell currency at a set time and value in the future. Changes in the value of currency have the potential to dramatically impact trading for international firms. Futures can help to minimise downside and maximise upside for traders who expect movements in exchange rates.
For example, consider a company in the US that has agreed to buy a machine from an Italian factory for EUR 1.1million. If the current exchange rate for USD/EUR is 1:1.1 then this will cost the firm $1 million to purchase. But, if the exchange rate moves to 1:1 the new machine price will be $1.1million – costing the company $100,000 more than they originally expected.
To avoid this scenario, the company might purchase five forex futures contracts with a value of $200,000 each. These contracts allow them to purchase at the current exchange rate on a set date in the future. If the exchange rate improves, they’ve lost the benefit they could have seen. But, crucially, if the exchange rate worsens, they don’t have to fork out the extra $100k they would have done had they had traded currency at the new rate.
Forex futures and options are often quoted together. The latter gives the contracted party an option to purchase the currency pairs at the old rate vs futures which are the obligation to.
There are futures and options available on most tradable assets – it’s not restricted to forex. This hedging tactic can be utilised on stocks, bonds and indices such as the S&P 500 (ticker symbol ^GSPC), Dow Jones (DJC) or USD index (DX); or commodities such as gold (GC), natural gas (NG), and crude oil (CL).
What Makes A Forex Future?
Forex futures have a number of differences compared to other assets.
Forex futures contracts are standardised and not customisable. This ensures they’re ease of trade on futures exchanges.
The nominal amount (eg. AUD$100,000), margin, maturity date, and delivery date are all standardised. The only contract component which is not is the price. This is determined by supply and demand on the exchange.
There are smaller forex contracts available for those looking for lower nominal amounts and margin requirements. These are known as ‘mini’ futures which are half the size of a standard contract. E-minis are even smaller, at one tenth vs the standard. And e-micro forex futures contracts are one tenth of an e-mini (i.e. one hundredth of a standard).
Publicly Traded On A Futures Exchange
Just like stocks on the National Stock Exchange (NSE), forex futures are traded through specific futures exchanges such as the Chicago Mercantile Exchange (CME Globex) or ICE Futures Europe in the UK.
To trade on live exchanges, brokers must be a futures association member (eg. part of the NFA in the US) or in the case of ICE, be a registered participant.
Some notable examples of futures brokers include TD Ameritrade, Interactive Brokers, and TradeStation.
The Tick (Minimum Price Fluctuation)
Another standardised feature of a forex futures contract is minimum price fluctuation know as ‘the tick’. Ticks are unique to the instrument being traded. For example, in forex, the USD tick size will always be $0.01. What that means on a contract size of $125,000 is that the minimum price fluctuation for the contract to be enforced is $1,250.
Margin & Leverage
Forex futures work on leverage, so a trader does not have to put down the full nominal value in order to invest. Instead, they use the margin as consideration (or a down payment) for the trade. The margin is a fraction of the nominal value, facilitating liquidity in the futures market. However, this means there’s a risk that losses could exceed the margin amount.
Despite this, because of UK regulation in the market, leverages on forex futures tend to be lower than for spot forex, which can be up to 1:500 at unregulated brokers.
Guaranteed By Clearing Houses
Once a trade has been executed, a third-party, known as a clearing house, steps in to ensure the trade has cleared and settled. Clearing houses also guarantee trades against credit losses ensuring that there is no risk of default by either party.
Benefits Of Trading Forex Futures
Forex Futures vs Spot Forex
Trading forex futures has some pros when compared to with trading spot forex. Spot forex trading involves buying/selling currency pairs (eg. USD/CAD) on the day of the trade. You’re exchanging one currency for another. But, there are major differences in how these instruments are traded (as mentioned above) which bring a number of benefits.
In particular, since there’s a central exchange, there are no market makers. Therefore, futures brokers cannot trade against you and there are no spreads.
You’ll also notice that volume and positioning data is hard to come by for spot forex, as it would only reflect the volume traded through the individual broker. Sharing this data would be the equivalent of Apple telling the market how many handsets they sold today and being able to compare this to their competitor’s sales. With futures, you’ll be able to access this data more easily because trading is centralised and heavily regulated by the FCA.
Forex Futures Strategies
There are a number of strategies that can be used when trading forex futures. Some of these are unique to futures and others you may recognise as similar to spot forex strategies.
- Speculation – Traders can use futures to speculate on a change in the value of a currency, index, stock or commodity and profit from the difference.
- Hedging – Hedging forex with futures reduces the risk of currency price movements on trade agreements. This tactic comes with pros and cons – investors won’t reap the benefits of a favourable price movement, but will mitigate the risk against an unfavourable one. It’s also useful for businesses reliant on commodities (such as natural rubber, gold or silver) who know that they’ll need to purchase in the future.
- Arbitrage – Forex traders can use the ‘futures spreads’ technique to benefit from discrepancies in market prices by taking both a long and a short position at the same time.
- Day trading – Day traders hold positions for a very short time period vs swing traders who could hold on for months. Letting a futures position rollover to the next day or over the weekend exposes you to risk. This is particularly prevalent on the forex market as exchange rates may not open at the same rate they closed at. Day trading eliminates this risk.
Where Are Forex Futures Traded?
Whilst forex futures are traded on centralised exchanges, as a retail trader you can enter the market using a broker. There are fewer futures brokerages than spot forex due to the heavy UK regulation on this instrument.
The best forex futures brokers enable you to trade the assets directly. Examples include Interactive Brokers, ADM Investor Services, AMT Futures Ltd & GHC Capital markets Ltd. All of these brokers are registered participants of the ICE Futures Exchange which facilitates global futures trades.There are also retail brokers which will offer you spread bets and CFDs on forex futures. You will not own the underlying futures contract, but will instead be trading on a derivative of futures. Brokers include FxPro, XM and Forex.com. Most providers offer detailed forex futures charts, symbols and quotes.
Trading on forex futures is available 24 hours a day, Monday-Friday.
Final Word On Forex Futures
Trading forex futures is big business in the UK. The financial product offers a means to hedge against exchange rate risks and to trade on the financial markets with leverage. Forex futures are available at multiple regulated trading brokers in the UK, though it is worth highlighting, spot forex and CFDs on forex are more readily available.
Is The Forex Futures Market The Same As A Spot Forex Market?
No, spot forex is trading one currency for another in a pair. The exchange takes place on the day the trade is executed. Futures are a commitment to purchase the currency at a later date, at a set price. They are considered derivatives, as they are a contract based on an underlying asset. Whilst the two markets are linked, there is not necessarily a correlation between them.
How Do Forex Futures Work?
Forex futures are financial derivative contracts that commit to purchasing currency at a set rate on a future date. They are often used to speculate on currency fluctuations or to hedge against poor exchange rates.
Are Forex Futures Profitable?
Yes, forex futures can be profitable if you have the right strategy in place. However, speculating on exchange rates is risky, particularly if you’re trading CFDs with high leverage. Some brokers, such as Daniel’s Trading, offer forex futures calculators to help you understand your risk and reward potential. Always ensure you understand the investment fully before you trade.
Does My Broker Offer Forex Futures?
A broker must be a registered participant of an exchange to trade forex futures. Most retail brokers offer CFDs on futures instead. Check our broker reviews to find a provider that’s right for you.
Forex Futures Vs Stocks - Which Is Better?
Neither asset is better than the other. The choice depends on your expertise, interests and risk appetite. Both are traded on centralised exchanges and are heavily regulated, and both can be profitable with a considered approach. But equally, they can be risky if you’re not willing to put the hours in to do the analysis.