Currency Futures Explained


Posted August 6, 2020 by Shaiq1

Understanding how Futures work: Currency Futures Explained In the simplest language possible, Futures are contracts to sell/buy a commodity (in this case it will be a currency) at a set date at a set price.

 
Understanding how Futures work: Currency Futures Explained In the simplest language possible, Futures are contracts to sell/buy a commodity (in this case it will be a currency) at a set date at a set price. What is achieved through this practice? The reason why this is such a well-established practice is that it provides security to both sides. The key point here is the set price. This means that whatever changes take place in the spot prices of the currency, usually that particular contract will still hold its value. For example, if a trader enters into a contract with another trader and agrees to sell USD at the rate 1.35 against XYZ currency and the contract expiry date is set for 6 months later, no matter what the value of USD is at the time of expiration the trader will sell the set amount of USD at 1.35. The motivation behind entering this deal from the point of view of the seller is the assurance that any price falls won’t affect them, and that from the buyer’s point of view is that any price hikes won’t affect them. This is how futures work for those looking to hedge and close all doors to any major risk. There is another type of trading that takes place with futures and we will get to it in a bit. Do spot prices affect futures at all? Yes, the rise and fall of spot rates will affect the futures rates if the change is seen as being a substantial one. The contracts that are already open and working will not be affected. However, new rates for futures will be set based on the current spot price.
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Issued By Shaiq1
Country Australia
Categories Banking , Beauty , Blogging
Tags currency , explained , futures
Last Updated August 6, 2020