What are Forex Futures?

Foreign exchange (forex) futures are exchange-traded financial contracts that enable buyers and sellers to lock in future exchange rates today by agreeing to exchange standardized contract amounts of two currencies at future expiration dates. On the expiration date, the buyer and seller are obligated to purchase and deliver, respectively, the amounts of the two currencies at the rate agreed upon when the contract was entered into. Forex futures may be bought and sold at any time until expiry. This enables buyers and sellers to close out their positions and eliminate any further exposure to changes in the foreign exchange rate. In practice, most contracts are closed out prior to expiration; the difference between the initial transaction's exchange rate and that of the opposite closing transaction is usually settled in cash.

On U.S. exchanges, forex futures are priced in terms of U.S. dollars per unit of foreign currency. This differs from the way foreign exchange rates for some currencies are quoted in international spot foreign exchange markets. In the U.S., forex futures contracts are listed and traded on centralized exchanges including the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). A given amount of foreign currency per unit of U.S. currency is specified as the standard amount for contracts traded on U.S. exchanges.

No actual exchange of currencies takes place when a forex futures contract is initially transacted. Rather, the value of exchange-traded forex futures contracts is based on a standard quantity of the two currencies as specified by the futures exchange. This amount is the quantity of the two currencies that the buyer and seller must exchange at expiration, that is, if the contracts are not closed out before expiration. Forex futures are marked to their market prices on a daily basis, a standard practice for derivatives traded on exchanges. As with all exchange-traded futures contracts, buyers and sellers must maintain margin deposits as required by the exchange.

Forex futures have traditionally been used by importers and exporters to hedge their exposure to fluctuations in foreign exchange rates. For exporters, doing so can protect them from a strengthening of their home currency vis-a-vis the currency they receive for the goods or services they export. Conversely, importers can use forex futures to protect themselves against weakening of their home currency, which would result having to pay more of their home currency for a given amount of imported goods or services denominated in a foreign currency.