- July 2015
- Posted By Ninoslav
- 0 Comments
Globally, foreign exchange has a daily volume that exceeds 5 trillion USD every single day. That’s the largest marketplace of any kind in the world. But all forex trading isn’t identical. There are many different kinds of forex trades and investments, and the number is growing every day. Forex futures contracts are one type of derivative securities that are growing by leaps and bounds. These types of trades require a great deal of forex analysis in order to ensure the greatest chance of success, but they also offer larger opportunities for hedges against other types of investment losses due to currency fluctuation.
Forex Futures Are Different Than Other Forex Trades
Forex futures are contracts that specify a buy or sell order that’s set for a particular day, tie, and contract amount. Forex futures are bought and sold like any other futures contract. Like other futures contracts, they’re publicly traded and the terms can’t be changed once the contracts are executed. They often have complex daily settlement procedures, however, administered by an intermediary called a clearinghouse.
The job of the clearinghouse is to guarantee that the participants in the trade are able to cover the value of the contract. While clearinghouses don’t require deposits of the full amount of the trades, they do require a margin. Because the margins on forex trading are so much higher than for stock trades, many investors like forex trading because it allows them to make large investments without tying up too much of their capital in deposit accounts.
Daily Mark to Market Settlement
The clearinghouse guarantees that there are no nasty surprises at the end of a forex futures contract by accruing gains and losses on a daily basis. This is known as a mark-to-market procedure. Clearinghouses take an average of the final trades of the day in order to calculate daily settlement prices. The settlement price is then compared to the terms of the futures contract, and any gains or losses are applied. Because these settlements happen daily, the chances that a margin could be exceeded without prior warning is low.
It’s common for margins for forex futures contracts to be as low as ten percent of the value of the contract. If the trader has only deposited the absolute minimum margin amount, a daily settlement loss can push the account below the minimum requirement. This results in the clearinghouse giving the trader a margin call, which is a request that the trader deposit additional funds to cover the shortfall.