** Assume two traders enter into a one-year (March 2019) Euro futures contract at a futures price of 1.1220 physically delivered. Regardless of the spot price on the settlement date, if the spot price on the agreed settlement day in March is below 1.1220, the long contract holder loses and the short position gains. If the spot price is above the futures price of 1.1220, the long position profits, and the seller records a loss. So why do many traders state that FX futures are the same like FX forward contracts but exchange traded, if on the delivery date, the amount exchanged is not the specified price on the contract like forwards but the spot value ? **
2 Answers
An FX Forward Contract is an private agreement between 2 known parties. The conditions are more flexible and each contract can be very different. A good example is a Large Corporate expecting a receivable in future [from sales] or payable in future for goods purchased. This Corporate will enter into a Forward Contract with his Bank. This is directly between Buyer and Seller. Disputes are less as the party know each other; however dispute if arisen is more time consuming to resolve as this moves directly to courts.
An FX Futures is a standardized contract that is listed on standard exchanges [Chicago Mercantile Exchange, etc]. The terms are more standardized so that listing, matching is easier. The Buyer does not know the Seller. The Broker, Exchange and Clearing provide the trust mechanism. Dispute mechanism is well established and more robust.
So why do many traders state that FX futures are the same like FX forward contracts but exchange traded, if on the delivery date, the amount exchanged is not the specified price on the contract like forwards but the spot value ?
I'll let into you a secret. Most traders have no idea how this stuff works.
From a trade strategy perspetive, these products do indeed seem very similar. That's by design. FX futures contracts are designed to be very similar to liquid OTC forwards. However, the actual cashflows over the lifetime of a position are quite different, because of variation margin etc. I believe for FX forwards they are cash settled, so the final settlement should be just the same variation margin process as usual, ie, MtM from the day before spot price.
However, the FX futures market is very small compared to the FX forward market. Most institutional players just use forwards.
