Which statement describes currency futures contracts?

Which statement describes currency futures contracts?

• A. An agreement to buy or sell currencies at a future date, customized.
• B. A contract that gives the buyer the option to exchange currencies.
• C. A contract that swaps principal and interest payments.
• D. Similar to forwards but traded on a public exchange with standardized amounts and dates.

Answer: (D)

Currency futures are standardized, exchange-traded contracts to buy or sell a specific amount of foreign currency on a set future date at a predetermined rate. They are like forwards in purpose (hedging or locking in a rate) but differ in form: they’re listed on a public exchange, have fixed contract sizes and delivery months, and are cleared through a central clearinghouse with daily settlement and margin requirements. This structure makes them highly liquid and reduces counterparty risk compared with private, customized forwards. The other instruments described are different: a customized private agreement aligns with forwards rather than futures; an option gives the holder the right but not the obligation to exchange currencies; a swap involves exchanging principal and interest payments.

Currency futures are standardized, exchange-traded contracts to buy or sell a specific amount of foreign currency on a set future date at a predetermined rate. They are like forwards in purpose (hedging or locking in a rate) but differ in form: they’re listed on a public exchange, have fixed contract sizes and delivery months, and are cleared through a central clearinghouse with daily settlement and margin requirements. This structure makes them highly liquid and reduces counterparty risk compared with private, customized forwards.

The other instruments described are different: a customized private agreement aligns with forwards rather than futures; an option gives the holder the right but not the obligation to exchange currencies; a swap involves exchanging principal and interest payments.