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Definition: Currency Futures
A futures contract is an agreement between 2 parties where one party commits to buy an underlying financial instrument and the other party commits to sell that financial instrument at a specific price on a future date.
In currency futures, this underlying financial instrument is “CURRENCY”. The transaction may be completed on the specified date by cash settlement or physical delivery or by offsetting prior to the specific date. These are generally marked-to-market daily and a certain “MARGIN-MONEY” is maintained by both the parties to cover their risks.
It is used basically for hedging against foreign exchange fluctuation risk. It is generally done by large corporations who have a huge foreign exchange exposure. It may also be done for short term capital gains through speculation.