Investing In Forex Futures
Forex futures are defined as contracts to buy a commodity or financial instrument at an agreed price at a specified time in the future. These contacts are traded in a futures exchange market. According to the Wall Street Journal Europe, as of 2006, the forex futures market accounts for an estimated seven percent of the total foreign exchange market volume. The average daily trade in foreign exchange markets worldwide is estimated to be over $3 trillion. Forex futures contracts were first traded in 1972 at the Chicago Mercantile Exchange and through the years, its volume had grown.
Trading of forex futures can be traced to the time of Ancient Greeks and Phoenicians. However, its modern history can be traced in Chicago around the 1800s. This United States city was a center of transportation, distribution and trading of agricultural products due to its strategic location in the Midwest region. Due to fluctuations in agricultural products prices, there had been shortages in the market. In order to protect traders and merchants from these fluctuations, forex futures are traded to minimize risks of adverse price change. The first futures market was formed in 1848 through the Chicago Board of Trade (CBOT) and it was in 1865 that standardized futures contracts were made. In 1972, the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange (CME), was formed to make futures contacts available in foreign currency including , Canadian dollar, British pound, Japanese yen, German mark, Swiss franc and Mexican peso. In this same year, trading of financial futures using the future value of interest rates commenced. This development in the forex market led to the growth of the interest swap market.
There are other financial instruments available in foreign exchange markets aside from forex futures. Other types that are commonly used are spot transactions, forward transaction, swap and options. Spot transaction is a direct exchange between two currencies and is a two-day delivery transaction. Moreover, cash is used in these transactions rather than contracts. Of all financial instruments, spot transactions have the largest volume in foreign exchange transactions. Forward transaction, on the other hand, is a contract wherein a buyer and seller agree on an exchange rate for any date in the future regardless of the prevailing market rates. Currency swaps are also common in the forex market and is characterized by the exchange of currencies of two parties for a pre-determined length of time. Lastly, options are derivatives wherein the owner is given the right but is not obliged to exchange money in one currency to another currency at an agreed exchange rate on a pre-determined future date.
Foreign exchange markets have the nature of over-the-counter (OTR) markets which means that there are no strict regulations regarding cross-border transactions. Moreover, currency instruments may be traded in any of the interconnected marketplaces scattered all over the world. However, major trading centers are located in London, New York, Tokyo and Singapore. Trading takes place continuously throughout the day as one trading center ends at a time when another trading center starts its operations.
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