Currency futures trading, a standardized foreign exchange derivative contract involves the buying or selling of a specified currency in the future. It is a derivative trading contract because their value is based on another underlying asset’s value.
While Forex trading involves the buying and selling of currencies instantly, futures involves two parties trading a currency pair at a predetermined price in the future.
A good currency futures trading example can be either the buying or selling of EUR/USD when it hits s specified rate in the future.
Although quite similar to Forex, currency futures is not as big as the former one. The Chicago Mercantile Exchange was the first to introduce the currency futures back in 1972. While Forex has a daily transaction of over $4 trillion, currency futures only has about $100 billion daily.
The prime difference between currency futures and Forex are:
While the Forex market is decentralized, the futures market is centralized.
The futures market involves a lot of transparency whereas Forex market does not.
Forex market involves the paying of rollover fees, ask spreads, and commissions to a broker. In Forex futures traders only need to pay a commission which is relatively lower than that paid in Forex.
While all the Forex currency pairs are a combination of all world currencies, futures trades only quote US dollars.
All currency futures trading demo have a maturity or an expiry date while Forex market does not have one.
A futures contract fixes the price of currency so it can hedge against a foreign exchange risk. It requires a minimum deposit to start a contract. Another currency futures trading example– assuming company ABC, exposed to heavy currency risk wants to hedge a projected receipt of €100 million in March.
The company sells a futures contract on the euro on February to be matured in March. This contract will have a specification of €100,000. So, to hedge its projected receipt ABC needs to sell 1,000 futures contract on the euro. If the EUR/USD goes down, ABC projected receipt stays intact. On the other hand, if the EUR/USD goes up, ABC loses all gains.
A contract for difference (CFD) although a derivative contract, is quite different from a futures contract. CFD has no future date or maturity date and is a contract between the broker and the trader. A CFD currency trading example will involve – 100 shares of a security bought at the price of $20, makes the total cost will come to $2,000. In a Forex trade, a broker might require a 30% commission where the trader needs to pay $600. On the other hand, a CFD broker only takes a 5% commission which comes to a minimum $100.
This was in short how the currency futures market and the CFD market works. To get more currency futures trading example visit LiteForex. They have a vast material to help in Forex trading, CFD trading, futures trading, and more.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.