A look at trading British Pound Futures

The British Pound is the currency of the United Kingdom and is one of the most popular currencies traded on the foreign exchange market. Forexpm run by Peter Marsden is an excellent resource on forex trading.

British Pound futures are contracts on the exchange rate between the Pound and the US Dollar. This symbol is quoted as GBP/USD on the spot forex market.

The biggest factor to influence the price of this contract is the interest differentials between the two currency pairs. Speculation on future interest rate changes often gets "priced in" to the pair well in advance of the actual event.

This has been largely a result of a strong British economy that has increased benchmark interest rates several times to tame inflationary pressures.

The standard British Pound Futures contracts are for £62,500. Each single cent movement in price would be worth $6.25. The nominal value in dollars depends on the exchange rate. For example if the exchange rate is $2 to £1, the nominal value of the above contract would be $125,000. This is the £62,500 multiplied by 2.

Currently the margin requirements for this contract are $2,700 initially and $2,000 for maintenance.

Lets take a look at an example of trading pound futures:

Let's say price the pound is priced at $2 against the dollar and Bob wishes to speculate that price will move up to $2.10 in the next three months.

If Bob buys one standard £62,500 contract and price moves up to $2.10 as he predicts, his contract will be up $6,250.

However, if Bob speculative view is wrong and price moves to 1.90, his contract will be -$6,250 and he may be required to supply additional margin funds to his broker to meet the maintenance margin requirements.

As you can see, trading the pound can be risky, but if can be highly profitable.

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