Currency futures are a fascinating financial instrument that allows traders to lock in exchange rates for currencies at a predetermined date. Unlike the often unpredictable nature of forex trading, these contracts are traded on regulated exchanges, offering transparency and standardization.
If you’re deciding between the forex market and futures trading, this guide will provide a clear comparison of currency futures with other popular instruments like currency spot and forward contracts. We’ll explore their unique advantages and disadvantages and explain how they are traded on centralized exchanges.
Let’s dive into the mechanics and benefits of currency futures to better understand their role in the dynamic world of finance.
What are Currency Futures Contracts?
Currency futures contracts are legally binding agreements that obligate two parties to buy or sell a specific amount of a particular currency against another currency at a predetermined exchange rate on a specified future date.
Several key features characterize currency futures contracts:
- Standardized: Like all futures contracts, currency futures have standard terms and conditions defined by the exchanges on which they are traded. This includes the contract size, delivery date and minimum exchange rate increments.
- Exchange-Traded: Unlike over-the-counter transactions like forward contracts, currency futures are traded on organized exchanges such as the Chicago Mercantile Exchange (CME). This provides greater transparency, regulation and oversight compared to decentralized markets.
Currency futures can serve various purposes, depending on the counterparties’ objectives. They can be used for either hedging or speculation:
- Hedging: Commercial counterparties who want to protect themselves against adverse movements in exchange rates can enter into currency futures contracts to lock in a fixed exchange rate for future transactions.
- Speculation: Traders seeking profit opportunities in the forex market can attempt to forecast future exchange rate movements and take currency futures positions accordingly.
The Chicago Mercantile Exchange (CME) offers a popular platform for trading currency futures through its Globex and ClearPort exchanges. These electronic trading platforms provide access to various futures contracts for currency, enabling market participants to engage in transparent, efficient, and liquid trading environments.
Globex, CME's electronic trading platform, operates virtually around the clock. It allows forex traders to access currency futures markets 23 hours a day, five days a week. This extensive trading window will enable participants from different time zones to trade seamlessly and manage their currency exposures effectively.
The ClearPort exchange complements Globex by offering a comprehensive clearing and risk management service for over-the-counter (OTC) transactions. This ensures that all trades are cleared through CME's clearinghouse, providing an additional layer of security and reducing counterparty risk.
How Do Currency Futures Work?
Currency futures have become a helpful tool for hedgers looking to protect against foreign exchange risk and traders seeking to speculate on currency exchange rate movements.
The following subsections describe their terms, quotation conventions, how their quotation codes are arrived at and how the cash settlement procedure works. For discussion purposes, note that most of this information focuses on the currency futures contracts traded on the CME exchanges, which are the largest marketplaces for currency futures worldwide.
Currency Futures Contract Terms
Foreign exchange futures contracts are standardized and their terms include five main components:
- The Underlying Asset: The actual currencies bought or sold against each other are traded in pairs. An example would be a futures contract on the EUR/USD currency pair, which refers to the EU’s euro being quoted against the US dollar.
- Expiration Date: Unless the contract is cash-settled, this is the date when the buyer must purchase the base currency, and the seller must deliver the counter currency in the agreed-upon quantities, which will depend on the contract amount and exchange rate.
- Contract Size: The number of base currency units that comprise each futures contract. For example, one standard EUR/USD currency futures contract traded on the CME might represent 125,000 euros worth of the euro base currency, while the GBP/USD futures contract has a 62,500 GBP contract size.
- Minimum Tick Size: The exchange rate of each currency futures contract can move in a given smallest increment or tick size. For the CME’s EUR/USD futures contract, the minimum tick size is 0.00005 on Globex and 0.00001 on ClearPort, while for its GBP/USD futures contract, the minimum tick size is 0.0001 on Globex and 0.00001 on ClearPort.
- Margin Requirement: In futures trading, margin refers to an initial deposit made by both buyers and sellers to cover potential losses that might accrue during the life of the futures contract if the relevant exchange rate moves.
The table below summarizes the key contract terms and details of the most actively traded currency futures on the CME, including their symbols, contract sizes, minimum tick sizes, tick values, trading hours and the contract months available for trading.
| Currency Pair | Symbol | Contract Size | Minimum Tick | Tick Value | Trading Hours (CST) | Contract Months |
| Euro / US Dollar | 6E | 125,000 EUR | 0.00005 | $6.25 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
| British Pound / US Dollar | 6B | 62,500 GBP | 0.0001 | $6.25 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
| Australian Dollar / US Dollar | 6A | 100,000 AUD | 0.0001 | $10.00 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
| Japanese Yen / US Dollar | 6J | 12,500,000 JPY | 0.0000005 | $6.25 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
| Swiss Franc / US Dollar | 6S | 125,000 CHF | 0.0001 | $12.50 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
| Canadian Dollar / US Dollar | 6C | 100,000 CAD | 0.0001 | $10.00 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
| Mexican Peso / US Dollar | 6M | 500,000 MXN | 0.00005 | $2.50 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
| New Zealand Dollar / US Dollar | 6N | 100,000 NZD | 0.0001 | $10.00 | 5 p.m. — 4 p.m. | Mar, Jun, Sep, Dec |
Currency Futures Quotation Conventions
Currency pairs that include the U.S. dollar are typically quoted in one of two formats: American terms or European terms. European terms apply not just to Europe-based currencies but to any currency other than the USD, where the U.S. dollar is the base currency and the other is the quote currency.
On the other hand, American terms place the USD as the quote currency in the pair. For instance, the British pound is quoted in American terms in both the spot and futures markets. This is shown as GBP/USD, with GBP being the three-letter symbol for the British pound.
Currency traders must recognize that the quote conventions in futures markets may differ from those in the spot market for the currency pairs they are trading. For example, the Swiss franc is quoted in European terms in the spot market, using the USD/CHF convention, where CHF is the three-letter symbol for the Swiss franc. Still, Swiss franc futures contracts in the CME futures market are quoted in American terms using the CHF/USD convention.
Currency Futures Codes
On futures execution platforms like the CME’s Globex and ClearPort, currency futures are listed using a trading code that includes the instrument, month and year.
For example, when trading euro FX futures on CME Globex, the contract code for the March 2025 futures would be 6EH5. Here, 6E is the product code, H represents the month of March, and 5 stands for the year.
Determination of Currency Futures Cash Settlement Value
Since CME currency futures can be settled in cash and via physical delivery of the underlying currencies, you may need to determine the cash settlement value of a futures contract you are a party to. Here are some relevant factors you should consider:
- Final Settlement Price: The final settlement price of a currency futures contract is based on a specified benchmark or reference rate. This rate is typically derived from the spot exchange rate of the underlying currency pair at a predetermined time on the contract's last trading day.
- Benchmark Rates: CME uses benchmark rates from reputable financial institutions or foreign exchange committees for many major currency pairs. For example, the WM/Reuters Closing Spot Rates or the European Central Bank (ECB) reference rates might be used.
- Settlement Day and Time: The last trading day for currency futures is usually the second business day before the third Wednesday of the contract month. The final settlement price is determined based on the spot exchange rate observed at a specific time on this day.
- Calculation and Publication: The CME calculates the final settlement price using the specified benchmark or reference rates. This value is then published by CME and used to settle the contracts.
The cash settlement value for currency futures on the Chicago Mercantile Exchange (CME) is thus determined based on the spot exchange rate of the currency pair at the time of settlement. A detailed explanation of how this process works follows:
For example, suppose you hold a futures contract for the euro (EUR) against the US Dollar (USD), represented as EUR/USD. The last trading day is a Monday, two business days before the third Wednesday of the month, and the CME then observes the spot exchange rate for EUR/USD at the specified benchmark time of 4 p.m. London time.
Using these standardized and transparent benchmarks, the CME helps ensure that the settlement process is fair, reliable, and reflects the actual market value of the currency pair at the time of settlement.
If the reference exchange rate at that benchmark time is 1.0900 EUR/USD, this rate is used as the final settlement price for the contract. The value of the futures contract is then cash-settled based on this rate, which means that you would receive or pay the difference in cash between the contract exchange rate and the final settlement rate multiplied by the contract amount.
Currency Futures Trading Example
Consider a hedging example where a U.S.-based importer makes an import contract in June to receive €1.25 million from its European customer the following September.
To protect the company against the risk associated with a possible decline in the eurodollar exchange rate or EUR/USD over the coming three months, the importer could enter into a set of 10 short currency futures contracts today for a total notional amount of €1.25 million for delivery in September where they agree to sell a total of €1.25 million for a set US dollar amount at maturity.
If the EUR/USD spot rate were to weaken before then, the importer would still have locked in the exchange rate they wanted to protect through the currency futures contracts they transacted.
In a speculative example, a currency trader expects the GBP/USD exchange rate to rise from its current 1.3000 level over the coming months. Therefore, they buy one GBP/USD futures contract at 62,500 GBP. After several weeks, the exchange rate rose to 1.3300, so the trader decided to take profits by selling out their futures contract to net a gain of 62,500x0.03 = $1,875.
Spot Rate vs. Futures Rate
The spot rate represents the current quoted rate for buying or selling a currency pair for cash-settled delivery in two business days. It reflects the currency pair's exchange rate for immediate, physically delivered currency so it does not include any time value adjustment due to prevailing interest rate differentials between the two countries.
In contrast, the futures rate for a currency futures contract is for delivery of the currency pair at some more distant point, usually a standardized quarterly delivery date such as March, June, September, or December.
The futures rate for a currency futures contract’s delivery date is derived from the prevailing spot rate, the Interbank deposit interest rates of the component currencies and the expected future market exchange rate of the underlying currency pair asset.
While the currency futures rate calculation incorporates the spot rate for the same currency pair, it differs due to the extended timing of the futures transaction’s delivery date. This time until expiry takes into account the prevailing interest rates of both nations and is reflected in the future’s pricing.
Suppose you went for the higher interest rate currency when you bought a currency futures contract. In that case, you will notice that futures contracts will generally trade at a discounted exchange rate relative to the prevailing spot rate. If you go short the higher interest rate currency, however, the futures contract will trade at a premium exchange rate compared to the spot rate.
Currency Futures vs. Currency Forwards
While currency futures and currency forwards share many similarities, some key differences distinguish them:
- Trading and Clearing Methods: Currency futures are exchange-traded and centrally cleared, whereas currency forwards are private bilateral OTC agreements.
- Standardization Levels: Futures contracts have uniform terms and conditions dictated by the exchange, unlike customizable forward contracts traded in the over-the-counter forex market.
- Risk of Default: Trading currency futures involves a clearinghouse acting as the official counterparty for security reasons, reducing the default risk. Forward transactions involve greater credit exposure since they are traded by individual financial institutions based on credit lines that they extend to their clients.
- Settlement Process: Future contracts settle upon expiration and can be paid in cash via mark-to-market mechanisms. In contrast, forward contracts generally require physical delivery of each currency amount when maturity is reached.
- Usage: Both products cater primarily to hedgers looking to protect against foreign exchange exposures but can attract varying degrees of speculative activity. However, those using day trading strategies tend to prefer futures.
Where Are Currency Futures Traded?
Three major global exchanges currently handle most of the world’s currency futures trading volume; these are:
- Chicago Mercantile Exchange (CME): Offering numerous currency pairs, CME boasts deep liquidity across multiple daily sessions.
- Intercontinental Exchange (U.S. Immigration and Customs Enforcement): U.S. Immigration and Customs Enforcement facilitates trading in major currency pairs and crosses such as GBP/USD, EUR/JPY and EUR/USD.
- Euronext Exchanges: With headquarters in Amsterdam, Paris, Brussels, Dublin, Lisbon, and Oslo, Euronext offers access to various European currencies.
These derivative exchanges provide essential infrastructure for currency futures trading, offering market participants efficient pricing discovery, lower transaction costs, increased market transparency and reduced counterparty risk. You can even connect your over-the-counter (OTC) FX positions with your currency futures positions into one Globex spread through the CME’s FX Link, which lets you better manage your overall FX exposure.
Also, due to the centralized exchange-traded nature of futures contracts, currency futures trading requires access to the market through a clearing member firm or Future Commission Merchant (FCM). Most futures trading occurs through the CME Group’s Globex Exchange, so to trade CME futures on that exchange, you would need an account with a CME Clearing FCM broker.
Finally, before you begin trading forex currency pairs in a currency futures market, be aware that futures trading generally involves a substantially larger capital commitment than trading currency pairs through a margin account with an online forex broker or using contracts for difference (CFDs).
Are Currency Futures Right for You?
You’re now much better equipped to decide whether currency futures align well with your strategic goals and risk appetite. Consider the inherent benefits and drawbacks of using such derivative financial instruments before investing in them.
Furthermore, for most retail traders with only a modest amount of trading capital to operate with, an online forex broker will generally offer a more accessible and affordable method of speculating on the foreign exchange market than currency futures.
Frequently Asked Questions
What are the pros and cons of currency futures?
On the benefits side, currency futures are highly regulated and transparent, reducing counterparty risk. They let hedgers protect against foreign exchange risk, investors can use them to diversify investment portfolios, and speculators can use them for trading purposes. The minuses of using currency futures include limited product offerings compared to over-the-counter markets, higher capital requirements to trade them, and a mandatory daily margining process.
Why trade currency futures?
Hedgers and traders may choose currency futures for various reasons, including capital appreciation, risk management, portfolio diversification, counterparty security, pricing transparency, regulatory compliance and the availability of options contracts.
How are currency futures settled?
Futures contracts all have a specific expiration date, and the last trading day for most CME-traded currency futures occurs on the second business day before the third Wednesday of the contract expiration month. Futures contracts can be settled in two ways: through cash settlement or physical delivery of currency. The cash settlement value for currency futures contracts is based on the difference between the initial contract exchange rate and the benchmark rate observed at expiration.
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About Jay and Julie Hawk
Jay and Julie Hawk are the married co-founders of TheFXperts, a provider of financial writing services particularly renowned for its coverage of forex-related topics. With over 40 years of collective trading expertise and more than 15 years of collaborative writing experience, the Hawks specialize in crafting insightful financial content on trading strategies, market analysis and online trading for a broad audience. While their prolific writing career includes seven books and contributions to numerous financial websites and newswires, much of their recent work was published at Benzinga.