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In simple terms, currency futures, sometimes also termed forex futures, consist of contracts traded involving a particular currency pair that will be exchanged for delivery on some future date. Unless closed out by a trader before maturity, they usually require the physical delivery of currencies, and they generally trade on an exchange such as the Chicago Mercantile Exchange.
Currency Futures versus Forward Outrights
In general, a forex futures contract on a currency pair will have the same exchange rate as an outright forward foreign exchange contract delivering on the same delivery date. Nevertheless, in some cases, the actual rate quoted may need to be inverted to be on the same rate quotation basis. This is discussed in greater detail below.
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Also, since forex futures contracts have standardized delivery dates and trade openly on exchanges like the Chicago IMM, they often enjoy higher liquidity and more transparent pricing than forward outrights. Nevertheless, the fixed delivery dates mean they offer less flexibility than outright forward contracts which can have any delivery date.
Furthermore, currency futures trade in certain fixed amounts on exchanges. Forward contracts, on the other hand, trade instead in the more flexible over-the-counter or OTC interbank market, so the amount of the contract entered into can vary according to the client’s specific needs.
Currency Futures Exchanges and the Open Outcry System
Even though exchange traded currency futures are offered by the New York Board of Trade’s Financial Instruments Exchange or FINEX division, the Chicago Mercantile Exchange’s International Monetary Market or IMM has been the principle market for futures on currencies since its founding in May of 1972.
Another key difference between futures and forwards arises from the fact that currency futures trade in an “open outcry” system on the trading floor. This assures the trader of the best prices and the deepest liquidity. The open outcry style of trading has been used for trading financial instruments for years.
Basically, in the open outcry system, a group of traders and brokers yell out their best bids and offers in a crowd on an exchange floor. This process also allows other participants from off the floor to participate through a broker. They might end up trading either with the “locals,” as the floor traders trading for their own account are called, or with other off-floor participants.
Forex futures floor traders constantly monitor the spot-rates on screens in the pits and make their bids and offers accordingly. In addition, options are also traded on the futures in adjacent pits.
Currency futures used to be traded exclusively on the exchange floor using this system. Nevertheless, the CME began its Globex international 24-hour electronic trading platform in 1999 and so forex futures contracts can now be traded around-the-clock, much like spot currencies.
Currency Future Contract Example
A standardized exchange-traded forex futures contract on a currency has certain standardized features that may give a forex trader an advantage over using an OTC forward outright contract.
- The Australian Dollar Futures ticker symbol is AD.
- The month of the delivery contract is the next letter in the symbol. For example ADZ would be Australian Dollar for December delivery.
- Contract Listing Cycle: Six months in the March quarterly cycle i.e. March (H), June (M), Sept (U) and Dec (Z).
- The standardized delivery date is the third Wednesday of the trading month the contract matures.
- Trade Unit: 100,000 Australian Dollars per futures contract
- Point Size: 1 point = U.S. $0.0001 U.S. x 100,000 per Australian dollar = U.S. $10 per contract.
- Minimum rate fluctuation: One point
Currency Futures Quotations
In any currency pair, the currency futures quotation will differ from the interbank spot rate quotation in the amount necessary to compensate for the anticipated cost of carry over the lifetime of the futures contract.
This cost of carry is reflected in the so-called “swap points” in the OTC forward market, and forward and futures traders calculate this cost mathematically for each currency pair. In essence, since the cost of carry depends on the interest rates in the country issuing the primary currency relative to the interest rates in the country issuing the counter-currency, the futures traders tend to use prevailing interbank deposit rates in the respective currencies for their cost-of-carry computation.
Furthermore, the way forex futures contract rates are quoted sometimes differs from the way outright forward contracts are traditionally quoted. For currency pairs in which the primary currency is the U.S. Dollar, like with JPY, CHF, and most minor currencies, the forward rate and the futures rate for the same delivery date will be the inverse of one another. Conversely, for those currency pairs in which the U.S. Dollar customarily takes the counter-currency role, like with EUR, GBP, AUD, and NZD, the quotations will look the same.