The futures market for anything (including FX) is a convenient way to get risk without doing daily settlements.
You know what the cost of carry is up to the futures expiry date, so you use that (non arbitrage) to set the adjustment for the futures price.
So then when you trade the future, you're not in need of settling some item (currency, bonds, cows) against some payment each day.
Currencies are indeed available each day, and are easily settled each day, but there's a number of reasons why you might want the future:
- If you settle each day, your account PnL depends on interest payments. With futures, it's just the difference between the prices traded. So easier to account for.
- Futures tend to be cheap to trade. Depends on your agreements. You have to pay interest on one side and receive it on the other side if you settle currency. And guess what, your prime broker gives you a crap rate on both!
You know what the cost of carry is up to the futures expiry date, so you use that (non arbitrage) to set the adjustment for the futures price.
So then when you trade the future, you're not in need of settling some item (currency, bonds, cows) against some payment each day.
Currencies are indeed available each day, and are easily settled each day, but there's a number of reasons why you might want the future:
- If you settle each day, your account PnL depends on interest payments. With futures, it's just the difference between the prices traded. So easier to account for.
- Futures tend to be cheap to trade. Depends on your agreements. You have to pay interest on one side and receive it on the other side if you settle currency. And guess what, your prime broker gives you a crap rate on both!