Put simply; E micro forex futures are a ‘micro’ version of regular forex futures contracts, that are aimed at allowing investors who wish to trade in forex futures but do not wish to invest the relatively large sums of money required to do so with regular forex futures contracts. Instead, these e micro forex futures allow investors access to the forex futures market, with an overall investment and expense amount that is lower than a full-fledged futures contract. In order to understand how e micro forex futures work, however, we mustn’t rely solely on this summarization of its definition. Let’s take a deeper look.
Understanding Futures Contracts
A ‘future’ and ‘futures contract’ are the same thing being referred to in two different terms. Imagine a scenario where you have a company making cereal and on the other hand, we have corn farmers. Both are dependent on each other. While the cereal producer wants affordable rates for the corn they acquire, the farmer wants assurance that the excess supply of corn will not diminish the price they receive. In order to combat this, they both enter into a futures contract.
A futures contract is an agreement between two parties to buy and sell an underlying asset when the term of the contract ends, at a predetermined price. This helps investors hedge their risk. By entering into the futures contract, the farmer and the cereal producer have both hedged their risk. If the market price goes up at the time of the contract ends, the farmer stands to lose; If it goes down, the cereal producer. However, regardless of the outcome, both parties have ensured their risk is hedged. A similar concept is followed in the forex futures market as well.
The Forex Futures Market
The forex futures market functions similarly to that of any other market. Here, investors weigh other currencies (known as the quote currency) against a currency of their choice (the base currency) while trading. This brings us to the second function of the futures markets; Speculation. As mentioned earlier, investors speculate on the price of an asset, and enter a contract accordingly, based on whether they expect the price to go up or down. Thus, the forex futures markets can be used by investors to achieve two goals; speculate on forex markets in order to make better returns, and the ability to hedge their risk. If you are trading the Rupee/Dollar pair, and your analysis tells you that the rupee will depreciate in the future, you can enter into a forex futures contract to counteract this. If markets don’t move in your favour, however, you stand to lose.
One question that is often asked while discussing forex futures and e micro forex futures, is why would one trade these futures contracts over forex trading. The answer to this is that forex futures contracts are traded on a centralized exchange, the CME Index setup by the CME group. It is here that e micro forex futures get listed as well. The biggest benefit here is that due to the centralized exchange, all investors are trading with the exact same rates and stats, something that is not possible in the forex trading markets, as it is not centralized and investors trade through a number of forex brokers.
E micro Forex Futures
Now that we have understood what a forex futures contract is, how it works and its benefits, understanding the concept of E micro forex futures does not seem as daunting after all.
An E micro forex futures contract is essentially a ‘micro’ version of the full-fledged futures contract. While a full-size forex futures contract ranges around the 100,000 units mark. This creates an obvious barrier to entry for inventors that do not have such a big investment pool. E micro forex futures help alleviate this roadblock, with allotment sizes being about 1/10th of normal forex futures, at 10,000 units. This provides an obvious benefit for investors.
Another benefit of e micro forex futures is that much like regular forex futures they are listed on the CME global index, allowing all investors to benefit from the standardization of the market.
Currency Pairs in E micro Forex Futures
E micro forex futures offer six currency pairs :
- US Dollar to Euro
- US Dollar to Japanese Yen
- British Pound to US dollar
- US Dollar to Canadian Dollar
- US Dollar to Australian Dollar
- US Dollar to Swiss Franc
The Pros and Cons
Previously in the article, we have mentioned a number of pros and cons of e micro forex futures, as the benefits of a centralized exchange and lower allotment sizes. There are risks involved as well, though these are derived from the nature of the type of instrument e micro forex futures are (the ‘futures’ section).
With the futures markets, while you have the ability to hedge your risk, you are effectively trying to speculate how the market will move, and act accordingly. The obvious caveat here is that no one can accurately predict the market. If you expect the price of a certain quote currency to go up but it goes down, you could stand to lose parts of your investment, as you will be committed to executing the contract on predetermined terms.
E micro forex futures are another addition to the various instruments being offered in markets in order to allow more and more people access to investment opportunities, in an attempt to eliminate their barriers to enter the market; If you are a skilled trader but do not have the capital, you might not be able to trade in the forex futures market, as the allotment size tends to be around 100,000 units (100,000 dollars for instance). With E micro forex futures, however, you need but 1/10th of that amount to begin your investing, at an average lot size of 10,000 units. With E micro forex futures, mini forex futures and a slew of other offerings, you can trade futures and reap the benefit of a centralized exchange, lower risk and good spreads.