Futures Trading

Futures trading is a specific type of forward outright deal which occupies a small part of the foreign exchange market. Because it is derived from the spot price, it is a derivative instrument. It is specific regarding the expiration date and the size of the trade amount. Whereas, generally, forward outright deals (the ones that mature past the spot delivery date) will mature on any valid date in the two countries whose currencies are being traded, standardized amounts of foreign currency futures mature only on the third Wednesday of March, June, September, and December.

Here are some of its characteristics that make it attractive to a large variety of players:

- It is open to all market participants, individuals included. This is different from the spot trading, which is virtually closed to individuals (except high net-worth individuals) due to the size of the currency amounts traded.

- It is a central market, just as efficient as the cash market, and whereas the cash market is a much decentralized market, futures trading take place under one roof.

- It eliminates the credit risk because the Chicago Mercantile Exchange Clearinghouse acts as the buyer for every seller, and vice versa. In turn, the Clearinghouse minimizes its own exposure by requiring traders who maintain a non-profitable position to post margins equal in size to their losses.

- Provides several benefits for traders because futures are special types of forward outright contracts and corporations can use them for hedging purposes.

- Although the futures and spot markets trade closely together, certain divergences between the two occur, generating arbitraging opportunities.

- Gaps, volume, and open interest are significant technical analysis tools solely available in the futures market. Yet their significance extrapolates to the spot market as well.

To continue learning about the foreign exchange market, click on the link below.

Return from Futures Trading to Foreign Exchange Market.

And to skip it and go straight to get a deeper sense of what forex is all about, click on the link below.

Return from Futures Trading to Foreign Exchange Center.

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