Futures based upon currencies are similar to the actual currency markets (often known as Forex). But there are some significant differences. For instance, currency futures are traded via exchanges, such as the CME (Chicago Mercantile Exchange); currency markets are traded via currency brokers. Therefore, they are not as regulated as currency futures. There are some day traders who prefer the currency markets; others prefer currency futures. If you are considering trading in the currency futures, be sure to understand what they are based on. Also, learn how transactions work, what margins are, and know some of the popular futures.

Currency Futures Background

Currency futures are based on the exchange rates of two different currencies. For instance, the euro and the dollar (EUR/USD) is a pair of currencies that have an exchange rate. The controlling currency is the first currency listed in the pair. In this case, it is the euro price that futures traders are concerned with. Traders buy a contract worth a set amount; the value of the contract goes up or down with the value of the euro. Currency futures only trade in one contract size, so traders must trade in multiples of that. As an example, buying a Euro FX contract means the trader is effectively holding $125,000 worth of euros. Since markets move in ticks, each tick is worth a certain amount of money for each type of investment and market. The Euro FX market moves in tick sizes of .00005 dollars per euro, or price movements of $6.25 ($125,000 X .0005). In other words, you purchase one Euro FX contract for $125,000; the value then moves up or down a certain number of ticks per day. If the change in price for the day was $.0051 per euro, you would have made $637.50. In the forex market, a trader can trade in multiples of $1000, which allows them to fine-tune their position size to a much greater degree. One market isn’t better than another. But one may suit a trader (and their account size) better than the other.

Settlement, Delivery, and Profits

Currency futures are based on the exchange rate of a currency pair. They are settled in cash in the underlying currency. For instance, the EUR futures market is based upon the euro to dollar exchange rate and has the euro as its underlying currency. Settlement and delivery occurs when a EUR/USD futures contract expires—the holder receives delivery of $125,000 worth of euros in cash to their brokerage account. Day traders, or anyone who is trading currency futures for speculation and profit, reap rewards based on the price difference between purchase and sale price. With futures, you can also sell first and then buy later, collecting a profit if the price drops. To determine the profit made on a currency pair, you first calculate the expiration amount and the tick values for the entry and exit amount. For instance, assume a trader buys a Euro FX contract at 1.2525 and then sells it at 1.2545. That is a 20 tick profit. Each tick in that contract is worth $12.50. That means the profit is $12.50 x 20, multiplied by the number of contracts the trader had bought. Each currency contract may have a different tick value. This can be checked on the exchange’s website (CME, for example). ( Tick Movement * Tick Value ) * Number of Contracts = Profit

Margins on Futures

Currency futures margin should not be confused with margin or leverage as it applies to stocks or the underlying currency market. With currency futures (or any futures contract), margin refers to how much the trader must have in their account to open a one-contract trade. To trade a Euro FX contract, a broker may require the trader have at least $2,310 to $3,000 in their account. Margins vary by currency broker (although the minimum is set by the exchange). This margin is designed to hold a position overnight. If day trading, brokers usually provide preferential margin, often only requiring a $500 balance be maintained in the account while holding the position. The margin is not a cost. Think of it as money that is held by the broker to offset any losses you may incur on a trade. Once the trade is closed, you will be able to use those margined funds again.

Many of the most popular futures markets that are based upon currencies are offered by the CME, including the following :

EUR—The Euro to U.S. Dollar currency futureGBP—The British Pound to U.S. Dollar currency futureCHF—The Swiss Franc to U.S. Dollar currency futureAUD—The Australian Dollar to U.S. Dollar currency futureCAD—The Canadian Dollar to U.S. Dollar currency futureRP—The Euro to British Pound currency futureRF—The Euro to Swiss Franc currency future

Many other currency pairs are also offered for trading via a futures contract.

The Bottom Line

Currency futures are a regulated and centralized way to participate in currency market movements. Currency futures move in increments called ticks, and each tick of movement has a value. The number of ticks made or lost on a trade determines the loss or profit of the trade. To open a currency futures trade, the trader must have a set minimum amount of capital in their account, called the margin. There are many currency futures contracts to trade; specifications for each one should be checked on the exchange website before trading it.