The Futures Market
Currency futures are another type of “forward outright” deals. Due to the fact that currency futures are derived from the spot price, they are derivative instruments. They are specific with regard to the expiration date and the size of the trade amount. Generally, forward outright deals—those that mature past the spot delivery date—will mature on any valid date in the two countries whose currencies are being traded. Currency futures mature only on the third Wednesday of March, June, September, and December.
There are many characteristics of currency futures that make trading them attractive. First of all, currency futures are open to all market participants, individuals included. The currency future market is a centralized market, whereas the cash market is a very decentralized market. Futures trading takes place under one roof. It eliminates the credit risk because the Chicago Mercantile Exchange Clearinghouse acts as the buyer for every seller, and vice versa.
In turn, the Clearinghouse minimizes its own exposure by requiring traders who maintain a non profitable position to post margins equal in size to their losses.
Although the futures and spot markets trade closely together, certain divergences between the two occur, generating arbitraging opportunities. Gaps, volume, and open interest are significant technical analysis tools that are only available in the futures market.
Due to these characteristics, currency futures trading volume has steadily attracted a large variety of traders.
Note: futures are forward outright contracts and forward prices are generally slow moving. The elimination of the forward spread will transform the futures contract into spot contract.
For traders outside the exchange, the prices are available from on-line service providers that provide real time price quotes. The most popular service providers are Bridge, Telerate, Reuters, and Bloomberg. Telerate presents the currency futures on composite pages, while Reuters and Bloomberg display currency futures on individual pages that show the convergence between the futures and spot prices.
