A futures contract is an agreement to purchase or sell an item at a later date. These agreements will mention the number of products and the precise expiration date. A futures contract will also specify the price for which the asset will be traded. One can speculate on indices, currencies, and commodities using futures contracts. They let the investor lock in a future price at which to execute their position. So, they are mostly employed as a hedge against unfavourable price changes.
Compared to over-the-counter contracts like forwards, futures contracts are subject to several rules. This is because they are traded on exchanges. It ensures a certain standard of quality regardless of the source of the asset. So, it is quite beneficial for investors. Further, there are different types of forex contracts. The e-micro forex futures is a prominent one among them. Read on to know more.
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The Forex Futures Market
The forex futures market works just like any other market. In this case, traders compare other currencies to the currency they choose. The currency they pick is referred to as the base currency. The other currency is called the quote currency. This leads to speculation, which is the second purpose of the futures markets. As previously stated, investors predict the value of an asset and sign contracts. Their decisions depend on whether they believe the price will rise or fall.
Investors may thus utilise the forex futures markets to accomplish two objectives.
- The first one is hedging their risk.
- The second is speculating on the currency market to generate higher profits.
Suppose you are trading the Dollar/Rupee pair. Your analysis indicates that the rupee may weaken in the future. You can offset this risk by purchasing a forex futures contract. However, you stand to lose if the markets don’t move in your favour.
What are E-micro Forex Futures?
An e-micro forex futures is a type of currency futures contract.
- They are a smaller or a micro form of a standard forex futures contract.
- Their goal is to allow novice traders to begin trading forex futures with less capital.
- A substantial amount of money is necessary to purchase conventional forex futures contracts. However, e-micro forex futures are small in size. So, traders can trade them even with less money.
- A standard forex futures contract with 1,00,000 units or more involves a substantial financial commitment. However, an e-micro forex futures contract has a 10,000-unit allotment size. They are ideal if you want to trade forex futures with less exposure.
- The CME Index is the centralised market where currency futures contracts are exchanged. The Chicago Mercantile Exchange (CME) Group established this index. The e-micro forex futures are also listed here. The centralised exchange offers the benefit of uniform pricing and statistics for all traders. So, all investors may trade with the same rates. This is not feasible in the forex markets, where investors must trade through many forex brokers.
How E-Micro Forex Futures Work?
- Forex futures are contracts in which the seller has to sell a particular currency at a predetermined price at a later date. Similarly, the buyer has the obligation to buy the currency.
- Assume that a trader already manufactures jewellery in the US. He now wants to expand his business to Japan. Next year, he will have to pay the plant’s running expenses in Yen.
- Now, all he would have to do is change US money to Yen to pay the electricity bills and salary. Exchange rates change continuously. It can cost significantly more in Dollars to purchase the same amount of Yen in one month than in another. This makes purchasing the Yen futures contract a good option.
- By purchasing a currency futures contract, you effectively fix the Yen’s current price. This removes the possibility of currency depreciation. However, it does include another risk. If exchange rates do not go in your favour, the amount you spend for Yen may become very expensive. So, you may have to overpay or underpay for the Yen when you need it. It will depend on currency prices at a given time.
- In any case, the futures contracts are standardised. This means that they define the quality, amount, and delivery of the underlying commodity. So, it ensures that the prices are the same for all market participants. Typically, the contracts have a $1,00,000 value. The only difference between micro and regular forex futures is the size. E-micro forex futures are smaller. They have a value of $10,000.
- E-micro forex futures are beneficial for small businesses. They can also be helpful for retail investors looking to just speculate in the currency markets or don’t need to hedge a lot of currency. Additionally, you will only lose $10,000 in a trade instead of $1,00,000.
Currency Pairs in E-micro Forex Futures
There are six pairings of currencies in e-micro forex futures. These consist of:
- US Dollar to Australian Dollar
- US Dollar to Canadian Dollar
- US Dollar to Swiss Franc
- British Pound to US Dollar
- US Dollar to Japanese Yen
- US Dollar to Euro
Advantages of E-micro Forex Futures
- Reduced Capital Needs: Low capital needs are one of the main benefits of trading e-micro futures. Traders can engage in the futures market using these contracts for a fraction of the cash needed for typical futures contracts. Due to this reduced capital requirement, traders with less funds can also participate in the futures market.
- Low-Risk Exposure: With e-micro futures, traders may lower the amount of risk they take. Compared to regular e-micro futures, traders can manage their risk by trading fewer contracts because these contracts are smaller in size. Novices who are still honing their trading abilities would benefit from this lower-risk exposure.
- More Liquidity: The increased liquidity that e-micro futures provide is another benefit. There are several buyers and sellers, and there is a lot of trading activity in the market. So, these contracts are considered highly liquid. This allows swift and competitive entry and exit positions for traders. So, the effect of slippage reduces and overall trading efficiency increases.
- Availability To Retail Traders: Retail traders were previously unable to trade in the futures market because of high capital requirements. E-micro futures have now made it possible for small investors to trade in the futures market. Individuals now have easier access to the same markets where institutional investors trade. This allows them to benefit from the same trading possibilities.
Risk of Trading E-micro Forex Futures
There is some risk associated with these instruments. The nature of futures contracts is the reason behind this. You can enter a contract with a predetermined price on the futures market to mitigate your risk. However, you have to predict how the market will move and take appropriate action.
There is a clear problem with this. You would have to carry out the contract according to preset conditions. Let’s say you believed that the price of a currency would increase. However, if it falls, you will lose some of your investment. Neither novice nor seasoned investors can accurately predict the forex futures market.
Conclusion
There are a number of financial instruments. One such instrument that enables more individuals to take part in investment opportunities is e-micro forex futures. They allow for all types of investors to take part in the market. Even though you could possess the requisite abilities and understanding of investments, you may lack sufficient funds. Trading in the forex futures market is challenging due to the allotment size, which is about 1,00,000 units. These barriers disappear with e-micro forex futures. The usual lot size is 10,000 units. All you need to start investing is a tenth of the whole amount. You may trade forex futures with fewer spreads, lower risk, and centralised exchange by using e-micro forex futures.
