What are currency futures?

Currency futures are futures markets where the underlying commodity is a currency exchange rate, such as the ZAR to US Dollar exchange rate, or the ZAR to British Pound exchange rate. Currency futures are essentially the same as all other futures markets (index and commodity futures markets), and are traded in exactly the same way.

Futures based upon currencies are similar to the actual currency markets (often known as Forex), but there are some significant differences. For example, currency futures are traded via exchanges, such as the JSE (Johannesburg Stock Exchange), but the currency markets are traded via currency brokers, and are therefore not as controlled as the currency futures. Some day traders prefer the currency markets, and some day traders prefer the currency futures. We recommend the currency futures as they do not suffer from some of the problems that currency markets suffer from, such as currency brokers trading against their clients, and non centralized pricing.

Settlement and Delivery

As currency futures are based upon the exchange rates of two currencies, they are settled in cash, in the underlying currency. For example, the ZAR futures market is based upon the ZAR to US Dollar exchange rate, and has the ZAR as its underlying currency. When a ZAR futures contract expires, the holder receives delivery of $125,000 worth of ZAR in cash. Note that this only happens when the contract expires, and as day traders do not usually hold futures contracts until they expire, they should not be involved in the settlement, and will not receive delivery of the underlying currency.

Examples of hedging

  • Investors hedge against foreign exchange risk.
  • Importers / Exporters, Manufacturer’s Companies & Individuals to hedge their exposure in different currencies more effectively.
  • SME’s – whose forex exposures are not large enough as per bank standards, but larger than compared to individuals.
  • Individuals or Entities with Commodities, Equity or Debt exposure.