Futures trading is a contract that allows an investor to buy an asset or commodity to be delivered at a date in the future, at a price set at the time the contract is made. Many investors use these contracts to make profit by selling the asset or commodity after an inflation in its price over time, but before the asset or commodity is delivered. There is no need for visual inspection of the goods, which may otherwise be necessary; because of this, trades of this kind are always standardized in terms of quantity and quality of asset commodity.
Currency futures trading is, as you may expect, the purchase of currency at a price set at the start of the contract to be delivered at a set date in the future, no matter what the exchange rate is on the future date. If the exchange rate is then favorable, the investor will make a profit; conversely, however, it is also easy to lose money if the future exchange rate turns out to be unfavorable to the investor.
Currency futures trading is useful in one of two ways. Here are two currency trading tips: (1) for hedging or (2) for speculation. Hedging is used when an investor knows they are to receive a certain amount of money in a particular foreign currency on a future date. To mitigate the risk of exchange rate fluctuations reducing the value of the money to be received, the investor can enter into a futures currency trade in the foreign currency for the value of the money to be received. This means that, regardless of fluctuations in the exchange rate, the investor’s profit will be set at the rate of exchange on the day the futures contract is started.
Speculation is, as discussed at the beginning of this article, when an investor enters into a futures contract for a certain currency expecting that the exchange rate will change favorably. If his or her prediction is correct, he or she will earn a profit.
Speculation can be risky, but it can also yield quick profits. Hedging is less risky and is an extremely useful tool in any investor’s arsenal.