A currency future, which is also referred to as FX future or foreign exchange future, is a futures contract. It is used to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. Typically, one of the currencies is the US dollar. Then the price of a future is settled down in terms of US dollars per unit of other currency.
This method can be different from the standard way of quoting in the spot foreign exchange markets. A certain amount of other currency is the trade unit of each contract, for instance €125,000. Most contracts posses physical delivery, so for those contracts that are held at the end of the last trading day, actual payments are made in each currency. However, before that most of the contracts are closed out. The contracts can be closed out by the investors at any time prior to the contract’s delivery date.
History
Less than one year after the system of fixed exchange rates was abandoned along with the gold standard, in 1972 Currency futures were first created at the Chicago Mercantile Exchange (CME). In the early 1970s, some commodity traders at the CME did not have access to the inter-bank exchange markets, when they presumed that significant changes were about to take place in the currency market.
