FX Futures


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Currency Futures or FX Futures Introduction and Pricing Guide


FinPricing provides valuation tools for the following FX products:

  • FX Option
  • FX Basket Option
  • FX Compound Option
  • FX Barrier Option
  • FX Asian Option
  • FX TARN
  • FX Accumulators Fader
  • Check FinPricing valuation models

1. Currency Futures Introduction

A currency future or an FX future is a future contract between two parties to exchange one currency for another at a fixed exchange rate on a fixed future date. Currency futures are one of the main methods used to hedge against exchange rate volatility, as they avoid the impact of currency fluctuation over the period covered by the contract.

Because currency futures contracts are marked-to-market daily, investors can exit their obligation to buy or sell the currency prior to the contract delivery date. Future market participants and speculators usually close out their positions before the date of settlement, so most contracts do not tend to last until the date of delivery. Currency futures contracts are legally binding and counterparties that are still holding the contracts on the expiration date must trade the currency pair at a specified price on the specified delivery date.

Investors use futures contracts to hedge against foreign exchange risk. If an investor will receive a cashflow denominated in a foreign currency on some future date, that investor can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cashflow. Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates.

Currency future contracts are usually used by exporters and importers to hedge their foreign currency payments from exchange rate fluctuations. By using FX future contracts, investors can protect costs on products and services purchased abroad or protect profit margins on products and services sold abroad lock-in exchange rates as much as a year in advance.

Future contracts are traded in an exchange and thus have no credit risk. By locking-in the exchange rates at which the currency will be bought, the party forfeits the opportunity of profiting from a favorable exchange rate movement. Additionally, unfavorable exchange rate movements may take away further opportunity of the party for profit


2. Forex Market Convention

One of the biggest sources of confusion for those new to the FX market is the market convention. We need to make clear the meaning of the following terms in the forex market first.

  • FX quotation: The quotation EUR/USD 1.25 means that one Euro is exchanged for 1.25 USD. Here EUR (nominator) is the base or primary currency and USD (denominator) is the quote currency. One can convert any amount of base currency to quote currency byQuoteCurrencyAmount = FxRate * BaseCurrencyAmount
  • Spot Date: The spot date or value date is the day the two parties actually exchange the two currencies. In other words, a currency pair requires a specification of the number of days between the quotation date (trade date) and the Spot Date on which the exchange is to take place at that quote. Spot days can be different for each currency pair, although typically it is two business days.
  • Holidays: Each currency pair has a set of holidays associated with it. The holidays of a currency pair is the union of the holidays of the two currencies.
  • FX curves: The observed curves in the FX market are FX forward points/spreads that cannot be used to price a FX trade directly. One needs to bootstrap FX forward points into FX yield curves in order to conduct valuation. Note that FX yield curves are quite different from LIBOR yield curves or government yield curves. Find more details about FX curves.

3. Pricing FX Futures Contracts

Currency futures prices are usually quoted by exchanges. A pricing model is mainly used to calculate risk for a future contract, although it may produce both price and risk.

The present value of a currency future contract is given by

Pricing currency futures in FinPricing

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