Part 2: Currency derivatives: forwards and futures
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A currency futurealso known as an FX future or a foreign exchange futureis a futures contract to exchange one currency for another at a specified date in the future at a price exchange rate that is fixed on the purchase date; see Foreign exchange derivative. Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of other currency. This can be different from the standard way of quoting forward futures and options foreign currency markets trading the spot foreign exchange markets.
Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each currency. However, most contracts are closed out before that. Investors can close out the contract at any time prior to the contract's delivery date. But the contracts did not "take off" because the Bretton Woods system was still in effect.
They did so a full two years before the Chicago Mercantile Exchange CME inless than one year after the system of fixed exchange rates was abandoned along with the gold standard. Some commodity traders at the CME did not have access to the inter-bank exchange markets in the early s, when they believed that significant changes were about to take place in the currency market.
The CME actually now gives credit to the International Commercial Exchange not to be confused with ICE for creating the currency contract, and state that they came up with the idea independently of the International Commercial Exchange. Currently most of these are traded electronically. Other futures exchanges that trade currency futures are Euronext. The conventional option maturity dates are the first Friday after the first Wednesday for the given month. Investors use these futures contracts to hedge against foreign exchange risk.
If an investor will receive a cashflow denominated in a foreign currency on some future date, that investor can lock in the current forward futures and options foreign currency markets trading rate by entering into an offsetting currency futures position that expires on the date of the cashflow. Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates.
As with any future, this is paid to him immediately. From Wikipedia, the free encyclopedia. This section needs expansion. You can help by adding to it. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Foreign exchange market Derivatives finance. Articles to be expanded from December All articles to be expanded Articles using small message boxes.
Currency Currency future Currency forward Non-deliverable forward Foreign exchange swap Currency swap Foreign exchange option. Bureau de change Hard currency Currency pair Foreign exchange fraud Currency intervention.