Currency future contract is a contract for future
delivery of a specified currency against another.
It is an agreement between two parties to exchange
one currency for another, with the actual exchange taking place at a specified date in the future but with the exchange rate being fixed at the time the agreement taken into. Organized Exchange. Standardization. Clearing house. Margin. Marking to market. Actual delivery is rare. It is traded on organized exchange either with a designated physical location where trading takes place, the trading pit or via computer screens.
It provides a ready liquid market in which
futures can be bought and sold at any times during the trading hours. Certain standards has been set regarding 1) size of contract 2) its maturity Contracts are traded in whole numbers.
For each contract, the exchange specifies a set of
delivery months and specific delivery days within
those months. It acts as an intermediaries. It guarantees performance It protects the contract till maturity by imposing margin requirements on traders. In case of future contract every transaction is done by the exchange member and clearing house, so exchange requires a performance bond in the form of margin deposited by the members who entered into a futures commitment.
margin value is generally between 2.5 to 10% of
the value of the contract.
It may be in the form of cash or securities like TB,
bank letter of credit, etc. It means that at the end of trading session, all outstanding contracts are re-price of that session.
Margins accounts of those who made losses are
debited and those who gained are credited. In case of futures actual delivery is rare because Futures are used as hedging device against price
risk and as a means of physical acquisition of the
currency.
Most of the contracts are extinguished before
maturity Future contracts are traded by a system of open outcry on the trading floor of a centralized and regulated exchange or through electronic screen trading. Floor trader (those who trade for their own a/c) Floor brokers (those who trade on behalf of others) Dual traders (those who do both) Delta hedge Cross hedge. Delta cross hedge. It includes Intra- currency spread :(exists when a speculator buys/sales the same currency for two delivery date) Inter – currency spread: (exists when the deal involves purchase and sale of future contracts with the same delivery date but with two different currencies)