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Forex futures contracts and hedging in currencies is achieved primarily through forex trading forex futures contracts futures contracts where the underlying asset is a particular currency. The value of a futures contract reflects expectations of the value of the currency when the contract expires, which is in contrast to the forex spot market where the values are based forex futures contracts current market values.
There are several advantages to using currency futures rather than trading the currency in forex forex futures contracts. Another major advantage of futures is that, unlike FX contracts, which must be rolled over every business daycurrency futures only need to be rolled over 4 times per year: March, June, September, and December.
However, rolling over must be done by the trader, by offsetting the expiring contract with another futures forex futures contracts that expires further in the future. Futures contracts, unlike FX contracts, forex futures contracts not rolled over automatically.
CME Group, which lists most of the currency futures in the United States USpublishes the official rollover date when traders are recommended to move their positions into the next contract month. The recommended date is 1 week prior to the official last trading day. However, it is better to rollover earlier when there is more liquidity. Volatility greatly increases in the last week before expiration. In forex, interest rate differentials between a currency pair are either paid to the trader, if the forex futures contracts is long on the currency with the higher interest rate, or the trader must pay the difference in interest, if short on the higher interest rate currency, every time a rollover occurs.
Interest rate differentials do not apply to currency futures contracts. Counterparty risk is greatly reduced because the exchanges generally require the brokerage firms forex futures contracts guarantee their brokers' transactions, so if the client forex futures contracts a particular broker has a negative balance and does not repay, then the broker must make good on the transaction. If the client, broker, and the brokerage firm all default, then the exchange will cover the deficit.
Currency futures have 3 standard contract sizes. Most futures contracts are closed forex futures contracts before delivery, but if the contracts are held on the expiration date, then the short seller must make delivery and the long holder must take delivery of the underlying asset.
Forex futures contracts, some futures contracts are cash-settled. Contract expiration is the date and time for a particular delivery month of a currency futures contract when trading ceases and the final settlement price is determined forex futures contracts that the delivery process can start. Currency futures contracts listed by the CME Group, which is the main futures exchange for currencies, sets delivery on the 3 rd Wednesday of March, June, September, December, unless Wednesday is a holiday.
The last trading day of CME currencies is on the 2 nd business day before the 3 rd Wednesday, which is usually the Monday before expiration, so the traders forex futures contracts do not wish to make or take delivery of the currency should exit their positions by the preceding Friday, forex futures contracts not earlier.
Almost forex futures contracts currency futures — except some e-micro futures and some lesser volume contracts — use the USD as the quote currency, which are referred to as American quotations. The minimum change in value of a futures contract is the tickequal to the contract size multiplied by the pip value of the currency.
Ticks are always expressed in USD. Price changes in currency futures are calculated by multiplying the number of ticks by a constant multiplierwhich is what a tick is worth in USD. The actual value of a tick will depend on the specific type of contract.
The euro and the Swiss franc contracts each representunits of the underlying currency, but the yen futures contract represents 12, units, because the yen is roughly equivalent to a Forex futures contracts penny.
The yen futures contract quote of 1. Some futures contracts, such as the yen and the Canadian dollar, are quoted inversely to the way they are generally expressed in forex. This is because futures contracts always use the dollar as the quote currency American quotations ; in forex, because of priority rules, the yen and the Canadian dollar are quoted with the dollar as the base currency rather than as the quote currency.
Forex futures contracts resulting prices will, therefore, be inversely related. To limit losses by clients, most FX trading platforms automatically liquidate client holdings as soon as their account balance drops below the margin requirements.
Forex only has 1 margin requirement that applies to everyone at all times. In futures, however, there is an initial margin requirement that must be met when the account is opened. Afterward, the maintenance margin requirementwhich is usually forex futures contracts than the forex futures contracts margin requirement, must be met at all times.
There are also separate margin requirements for speculators and hedgers — speculators have higher margin requirements. The National Futures Association NFA sets the leverage ratio for FX markets, but the margin requirements in futures markets are determined by the exchanges since they guarantee the trades. However, brokers will often have more restrictive requirements. Brokers will often adjust margin requirements, depending on forex futures contracts conditions.
During fast-moving markets, margin requirements may increase significantly. Futures accounts are marked to market every day, meaning that the net value of each account is determined at the end of the trading session, which for CME currency futures is 4 PM Central Standard Time.
If an account increases in value, then margin is increased for that account — the increase is taken from accounts that have lost value.
Because margin is increased or decreased daily, according to the account value, this margin is sometimes referred to as variation margin. Unlike the margin in stocksthe margin in a futures account is not borrowed money but is simply the equity necessary to ensure the performance of the contract, which is why the required margin in a futures account is sometimes known as a performance bond. Indeed, most brokers even allow using T-bills for margin, allowing the trader to earn a small amount of interest.
However, if the broker must sell T-bills to maintain the necessary margin aka "breaking a T-bill"a fee will be charged that is usually much more than the interest earned on the T-bills.
For this reason, many retail customers use cash to post margin. When a margin call is issued, margin can be restored by liquidating positions, depositing more funds, or using option hedges. Once a margin call is issued, then the margin must be brought back up to the initial margin requirement, not the maintenance requirement. Unlike the early days, traders are not notified of a margin call by phone, but usually by email with details regarding open positions, required initial maintenance margin, the margin deficiency, and the current account value.
Generally, futures brokers give traders at least 2 to 3 days to eliminate a margin call. However, deep discount brokers tend to be stricter in margin call requirements and are more likely to force liquidation.
Because day traders usually close their position before the end of the session, they usually have lower margin requirements.
Day trading is a trade that is entered and exited in the same trading session. Because currency futures markets trade nearly 24 hours per day, a trade entered shortly after the session close and exited before the next trading session close on the following day is still considered a day trade. Forex futures contracts, most brokers grant the more favorable margin requirements accorded to day traders only if forex futures contracts transactions are opened and closed between 7 AM to 2 PM central time, since liquidity is greatest during this period; some brokers may extend that to 4 PM.
Forex futures contracts, some contracts are different. Because the major export products forex futures contracts Australia and Canada are commodities, the Aussie and Canadian dollar often move with commodity prices, so they are often called commodity currencies. So if an Aussie dollar futures contract moves from 1.
US Dollar Index was introduced in and represents the value of the dollar against a basket of major currencies: With an index as the underlying asset, quantities are not treated as individual currencies but as relative values. Unlike currency futures, the size of the Dollar Index symbol: DX is forex futures contracts by the value of the index.
Obviously, forex futures contracts contract size will vary with the index. The easiest way to calculate profit or loss is to consider only the numbers that yield the difference, then multiply by 5. So, for instance, if the dollar index moved from Unlike most index futures, the ICE US Dollar Index is settled by actually delivering the currencies in proportion to their weight in the index to the seller of the futures contract, who pays the long position the final settlement price in USD.