Currency Futures

Tim Weithers

Chapter 12 in The World Scientific Handbook of Futures Markets, 2015, pp 381-405 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Foreign exchange (FX) is the largest of the financial markets. Currency futures, the first of the financial futures contracts listed on an organized exchange, while not constituting a particularly large portion of global FX volume (around 5%), have seen their market share growing — due to their transparency, their counterparty risk remediation, and being the beneficiaries of the clearing that exchanges provide. Currency futures pricing is based on the same driving factors as over-the-counter (OTC) FX forward pricing: the spot price, the maturity (or time horizon), and the relevant interest rates for the two currencies involved. Many FX futures are physically settled, but some (including all those on non-deliverable currencies) are cash settled. There are also listed FX options (which primarily settle into FX futures). The year-on-year growth in some of these exchange-traded currency derivatives has been rather spectacular due to the ever expanding global FX trading volume, the leverage which futures provide, the popularity of this product area for high frequency and algorithmic trading firms — as well as global macro hedge funds, and the recognition (on the part of the investment community generally — and retail clients in particular) of the benefits of FX as an asset class.

Keywords: Futures Markets; Pricing; Risk Management; Futures Trading; Stock Indexes; Interest Rates; Futures Prices; Portfolio Theory; Hedge Funds; Foreign Exchange (search for similar items in EconPapers)
Date: 2015
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