A currency futures contract, commonly referred to as an FX futures, is an agreement to exchange one currency for another at a specified future date for an agreed price (exchange rate) that is set at the time of entering into the contract.
Although currency futures contracts and currency forwards have many similarities, futures contracts are standardised and traded on centralised exchanges as opposed to currency forwards which are customised contracts.
In order to reduce counter-party risks on such contracts, exchanges have a margin system in place for such contracts.
Currency futures are regarded as a financial derivative because the contract’s value is determined by the movement in the exchange rate of the underlying currency pair in the spot market.
The currency futures contracts are mostly cash-settled and are marked to market on a daily basis.
Currency futures can be used to speculate on currency price movements or as a hedge against currency risks.
Currency futures are popular among speculators, because the initial margin required to enter into the contract is typically a small portion of the actual contract size. This allows them to effectively use leverage to increase their exposures to the underlying risks.