Futures Contracts

• A futures contract is an agreement to buy

or sell a specified quantity of a specified
asset at a certain point in the future at a
price agreed upon today
• In the case of currencies, it is an
agreement to buy/sell a specified quantity
of a specific currency at a pre agreed upon
exchange rate at a certain time in the
future
 Currency Futures
• Trade on an organized exchange
• Futures contracts are standardized with
regard to the following
– The asset on which you trade a futures
contract
– The contract size
– Delivery arrangements
• Daily price movement limits-limit up and
limit down
• Position limits
• Mark to Market on a daily basis
 Hedging and Speculation
using Forwards
• Expect a currency to appreciate
– Buy that currency forward (Long Position)
• Expect a currency to depreciate
– Sell that currency forward (Sell Position)
• Profit/Loss in a long position:
ST – K( Strike Price)
• Profit/Loss in a short position:
K – ST
Where ST is the spot exchange rate at maturity and
K is the forward exchange rate at which you
buy/sell a currency forward.