Although the Forex market is the best-known method of participating in foreign exchange for traders and investors, it is not the only way. Forex futures, also known as currency futures or foreign exchange futures offer an alternative way to access the foreign exchange market in a way that is comparable to other future contracts. While it is not quite as large as the Forex market, Forex futures does allow for the buying or selling of exchange traded futures contracts. These futures contracts are specified amounts of a specific currency that has a date and price set in the future.
Types of Forex Future Contracts
Forex futures contracts are available in a couple of different varieties. These different contracts also all have varying degrees of liquidity. The most popular contracts are typically the euro and United States dollar currency future contracts, but there are also currency pairs for emerging markets. In addition, E-Micro Forex Futures contracts are available that trade at smaller sizes than the standard currency futures contracts. Future contracts offer a way to hedge against foreign exchange risk by locking in the exchange rate while speculation can bring in profits due to rising or falling exchange rates.
Specifications For Forex Future Contracts
In order to assist traders with determining what their potential for loss or profits may be, futures contracts have to include a list of specifications. These specifications typically include the contract size, the minimum price increases as well as the corresponding tick sizes.
When viewing a Forex Futures Contract Specifications list, the name column indicates the underlying asset that will be delivered on the date specified. For example in the agriculture category the assets might be corn, wheat or oats while for energy it could be crude oil, natural gas or ethanol futures.
The size specifies the unit as well as amount of the commodity that is represented by the futures contract. For example, oil might be measured in gallons while corn is measured in bushels and soybean oil in pounds. This means when buying one heating oil futures contract you are actually controlling 42,000 gallons of heating oil.
The contract months, or deliver months, indicates the standardized months in which the underlying commodity can be traded for delivery. While some futures have all the months, some only have a few. Bear in mind that the months are indicated by letter codes in tickers, so January is “F” while September is “U.”
The tick size on the contract indicates the minimum fluctuation or the smallest increment that the specified futures market can move. For example the tick size for platinum might be 10 cents per troy ounce while for soybean meal it could be 10 cents per ton. The value of the tick can be calculated by multiplying it with the contract size, so a 100 ton soybean meal contract with a tick of 10 cents per ton would equal to $10 per contract.
The exchange symbol indicates the futures exchange on which the futures contract is traded. For example, the New York Mercantile Exchange will be indicated by the symbol “NYMEX” while “CBOT” indicates the Chicago Board of Trade.