Currency futures were first created in 1970 at the International Commercial Exchange in New York. But the contracts did not “take off” because the Bretton Woods system was still in effect. Today, the IMM is a division foreign currency trading simulation CME.
Currently most of these are traded electronically. Other futures exchanges that trade currency futures are Euronext. You can help by adding to it. As with other futures, the conventional maturity dates are the IMM dates, namely the third Wednesday in March, June, September and December. The conventional option maturity dates are the first Friday after the first Wednesday for the given month.
Investors use these futures contracts to hedge against foreign exchange risk. If an investor will receive a cashflow denominated in a foreign currency on some future date, that investor can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cashflow. 1,000,000 worth of futures contracts expiring on December 1. Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. As with any future, this is paid to him immediately.
Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. Jump to navigation Jump to search Not to be confused with Currency swap. A foreign exchange swap has two legs – a spot transaction and a forward transaction – that are executed simultaneously for the same quantity, and therefore offset each other.
Forward foreign exchange transactions occur if both companies have a currency the other needs. It prevents negative foreign exchange risk for either party. The most common use of foreign exchange swaps is for institutions to fund their foreign exchange balances. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. The interest collected or paid every night is referred to as the cost of carry. Companies may also use them to avoid foreign exchange risk.
A British Company may be long EUR from sales in Europe but operate primarily in Britain using GBP. However, they know that they need to pay their manufacturers in Europe in 1 month. They could spot sell their EUR and buy GBP to cover their expenses in Britain, and then in one month spot buy EUR and sell GBP to pay their business partners in Europe. However, this exposes them to FX risk. Thus, the value of the swap points is roughly proportional to the interest rate differential. A foreign exchange swap should not be confused with a currency swap, which is a rarer long-term transaction governed by different rules.
Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. 41 – Hypothetical or Simulated performance results have certain limitations, unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity.