Foreign Exchange Futures
If you do not want to accept the credit risk of a counter party in an FX transaction for future settlement, you can use FX Futures.
In a FX Future transaction, you enter into a trade with a Futures Exchange. They ensure that all trades will settle as per the contract by requiring the posting of margin as the exchange rate moves each day. If someone does not settle their trade, the Futures Exchange liquidates their position in the spot market and liquidates enough margin to ensure the trade settles properly.
Unlike the forward market, the futures market is less flexible. Futures contracts are for set amounts, and settle at specific dates in the future, usually quarterly. The price the future sells at is called the strike price.
The major advantage to the futures market is that you have no real counterparty risk. The major disadvantages are that you may have to post margin and that the settlement dates and contract amounts may not match your needs precisely.
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