Forex Futures are exchange traded contracts that allow the trader to buy or sell a particular currency pair at a predetermined price in the future. All the contracts have a date of expiry. The future prices of futures contracts is usually based on the interest rate differentials between two currencies. For example if we look at the current futures on GBP/USD:
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At present the Bank of England has the base rate at 5.75%. This is 1% higher than the US Federal Reserve at 4.75%. This interest rate differential is priced into the above futures contract. You can see the further out the contract, the more favorable the price would be for a long contract, conversely a short contract would be less favorable. The pricing of futures contracts also takes into consideration the likelihood of future rate changes that may occur during the period of the contract.
On opening a futures contract, the quoted prices will be your entry price. The actual price of your futures contract will move closer to the underlying spot price as time elapses until they are equal on expiry.
Disadvantages
A big disadvantage with futures is the fact that the futures market is much less liquid than the forex market. If you need to open a position whilst the futures market is closed it could be very difficult. Overnight contract do exist, but they tend to be very thinly traded which can often mean very high spreads.
Another disadvantage is the execution of trades is often slower than the forex market, especially when liquidity is low. Also, leverage is much lower in the futures market. It is not uncommon for forex brokers to offer 200:1 leverage or even more. Leverage on futures contracts is much lower.
Futures are used by international corporations to hedge their currency risks and also by traders seeking to profit from speculative positions.
