Future Forex Trading
There are two main purposes of future forex trading. Futures can be put to use either by sole proprietors or companies to do away with the exchange rate risk that is always a part of transactions that occur cross-border. The second reason is that the futures can be made use of by investors who wish to both profit from and contemplate the fluctuations that take place with the currency exchange rate.
The future forex trading contracts trade on four specific dates of the year (as previously mentioned). Those dates are the third Wednesday of the months of March, June, September and December (one for each season of the year). If we were to compare the futures market to the cash market for forex a big difference would be noted in this area. With the cash market the maturity dates for currency need to be altered every day with trading mainly going on in a monthly way with maturities of one, two, three, six and twelve months ahead of schedule. With this market there is a certain degree of flexibility in that any date in-between the above ones can be quotes easily. The forex or ‘interbank” market is designed to work as a market for deliveries. In other words, it trades for deliveries that are “spot” and “forward” meaning that all financial transactions that take place in the financial sector have to be worked out and settled completely for the entire face value of each and every currency transaction.
As compared to the market of currencies, future forex trading enables traders to both buy and sell contracts and therefore due to this, they do not have the express need to settle the trades with money. Futures are always “spot prices” and are adjusted by the “forwards” to come to a decided upon delivery price for the futures. Traders prefer to keep abreast of changes that are taking place in both markets concurrently.
Forwards in future forex trading come about due to interest rate differentials. To use an example, if a yen conversion is called for and the price must be fixed with no delay then this is possible simply by borrowing money for the period of one year. To do this one would convert the American dollars into yen and then put the money in a one-year deposit account. Over the course of the year the yen deposit will mature and the proceeds from the deposit can be used down the road to meet whatever future commitment the yen must adhere to.
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