A Currency Future contract is a commitment to deliver
or take delivery of a given amount of currency (s) on a specific future date at
a price fixed on the date of the contract. Like a Forward contract, a Future
contract is executed at a later date. But a Future contract is different from
Forward contract in many respects. The major distinguishing features are:
ó Standardization,
ó Organized exchanges,
ó Minimum variation,
ó Clearing house,
ó Margins, and
ó Marking to market
Futures, being standardized
contracts in nature, are traded on an organised exchange; the clearinghouse of
the exchange operates as a link between the two parties of the contract,
namely, the buyer and the seller. In other words, transactions are through the
clearinghouse and the two parties do not deal directly between themselves.
While it
is true that futures contracts are similar to the forward contracts in their
objective of hedging foreign exchange risk of business firms, they differ in
many significant ways.
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