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FUTURES
CURRENCY FUTURES
A futures contract, like a forward contract is an agreement
between two parties to exchange one asset for another, at a
specified date in the future, at a rate of exchange specified up
front. However, there are a number of significant differences.
FUTURES CONTRACTS
Global Futures Exchanges:
1) IMM: International Monetary Market
2) LIFFE: London International
Financial Futures Exchange
3) CBOT: Chicago Board of Trade
4) SIMEX: Singapore International
Monetary Exchange
5) DTB: Deutsche Termin Bourse
6) HKFE: Hong Kong Futures Exchange
FUTURES CONTRACTS
B. Forward vs. Futures Contracts
Basic differences:
1) Trading Locations
2) Regulation
3) Frequency of delivery
4) Size of contract
5) Transaction Costs
6) Quotes
7) Margins
8) Credit Risk
Forward Markets
Customized
Customized
Banks, brokers,
Standardized
Banks, brokers,
Security
Compensating
Small security
Clearing
Handled by
MNCs. Public
speculation not
encouraged.
MNCs. Qualified
public speculation
encouraged.
deposit
bank balances or
credit lines needed.
operation
individual banks
& brokers.
clearinghouse.
Daily settlements
to market prices.
deposit required.
Handled by
exchange
Futures Markets
Standardized
Forward Markets
Worldwide
telephone
network
Futures Markets
Central exchange
Regulation
Self-regulating
Commodity
Liquidation
Mostly settled by
Mostly settled by
Transaction
Banks bid/ask
Negotiated
Futures Trading
Commission,
National Futures
Association.
actual delivery.
Costs
offset.
spread.
brokerage fees.
FUTURES CONTRACTS
Advantages of Futures: Disadvantages of
Futures:
1) Easy liquidation
2) Well- organized and
stable market.
3) No credit risk
1) Limited to a few
currencies
2) Limited dates of
delivery
3) Rigid contract sizes
1)
2)
3)
4)
5)
6)
7)
FUTURES CONTRACTS
Transaction costs:
Commission payment to a floor trader;
Brokerage, Bid-Offer Spreads
Leverage is high
Initial margin required is relatively low
(less than 2% of contract value).
FUTURES CONTRACTS:
SAFEGUARDS
Maximum price movements
1) Contracts set to a daily price limit
restricting maximum daily price
movements.
2) If limit is reached, a margin call may
be necessary to maintain a minimum
margin.
System of Margins
Initial margin : When position is opened
Variation Margin: Settlement of daily gains and losses
Maintenance Margin : Minimum balance in margin account.
Balance falls below this, margin call issued. If not met, position
liquidated.
Regulators specify minimum margins between clearing
members and clearinghouse. Margins at other levels
negotiated
Margins can be deposited in cash or specified securities such
as T-bills. Interest on securities continues to accrue to owner.
Margin is a performance bond.
Levels of margins may be changed if volatility increases.
System of Margins
With clearing house guarantee, buyer-seller need not worry
about each others creditworthiness.
Standardized contracts with margin system increase
liquidity.
CLEARING
HOUSE
CLEARING
MEMBER A
CLEARING
MEMBER B
NON-CLEARING
MEMBER
CUSTOMER
NON-CLEARING
MEMBER
CUSTOMER
CUSTOMER
CUSTOMER
British Pound
625000
$ 0002 per
($12.50)
Japan Yen
12,500,000
$0.000001 per
($12.50)
Open
High
Low
Settle
Chg
1.1109
1.1153 -.0017
1.1120
1.1167
-.0018
Op Int
117663
107
9
OCTOBER 1, 2009
BRITISH POUND (CME)
Contract
Dec 09
Open
High
1.6005 1.6024
Mar 10 1.5992
1.6009
Low
Settle
Chg
Op Int
1.5920
1.5946 -.0056
102389
1.5923
1.5945 -.0056
97
OCTOBER 1, 2009
SWISS FRANC (CME)
Contract Open
Dec 09 0.9658
High
Low
0.9678 0.9571
Settle
Chg
0.9608 -.0052
OP INT
45156
OPEN
HIGH
LOW
CLOSE
OP.INT
NOTIONAL
VALUE
OCT 09
47.90
47.99
47.78
47.86
300000
522288.06
NOV 09
48.03
48.10
47.89
47.96
95700
139438.45
DEC 09
48.11
48.18
47.99
48.05
4800
1482.95
JAN 10
48.19
48.19
48.10
48.10
2000
15.01
Mumbai, Dec 2 The December futures contract today ended higher at 50.43 on the
currency derivatives segment of the MCX Stock Exchange (MCX-SX).
The December contract resumed lower due to sharp losses seen in Asian stock
markets. Looses in the market would see more outflows of funds, which would
continue to pressure rupee in the near term.
RBI intervention was seen around 50.50 to arrest the rupee fall. But the inflows into
the system are very less compared to outflows by the FIIs. Foreign fund outflows
have been a key factor for the rupee's decline this year, which is 22 per cent down.
One-month offshore Non-Deliverable Forward contracts were quoting at 51.35/50,
weaker than the onshore spot rate, indicating a bearish outlook for the currency.
Supports for December contract are at 50.15 followed by 4990, while the resistance
are seen around 50.95 followed by 5120 levels and January futures closed towards
50.65 and registered a volume of 96.385 crore
Spot rupee closed stronger during the session. Supports hold between 49.55/65
followed by crucial support at 49.10, Resistance are around 50.90 followed by 5130
levels
The MCX-SX active December contract registered volume increase of around 21.16
per cent over the previous session.
Backwardation
Contango
FUTURES
PRICE
FUTURES PRICE
Expiry
Time
Expiry
Time
Three Decisions
(1) Which contract should be used i.e. the choice of
"underlying".
Home currency A; exposure in B; futures on B against A
available Direct hedge.
Home currency A; exposure in C; no futures on C against
A. B and C are highly correlated; use futures on B Cross
Hedge
(2) Choice of expiry date : In February A UK firm books a USD
payable maturing on June 3. To hedge, must sell GBP futures
(Buy USD futures). Which month? June or later?
(3) How many contracts? Choice of hedge ratio.
F
A
A
F
Then
(VC)2 2(ST1) + (VF)2 2(FT1T2) 2VCVF COV(ST1 F~ T1,T2)
= (VC)2 [ 2(ST1) + H2 2(FT1T2) 2H COV(ST1 F~ T1,T2)]
To minimize this w.r.t. H
2 H 2(FT1T2) 2 COV(ST1 F~ T1,T2) = 0
This leads to
H = VF/VC = COV(S~T1, F~T1T2) / VAR(F~T1T2)
We need forward-looking estimates of these parameters.
Using past data estimate a regression equation:
S~T1 = + F~T1T2 + u
The estimate of can be used as hedge ratio. But this would be
a historical estimate.
where
[1 + rB(T-t)]
k = ----------------[1 + rA(T-t)]
SPREAD TRADING
Intercommodity Spread
In April : Spot EUR/USD : 1.5500 GBP/USD: 1.9000
September Futures: EUR: 1.5800 GBP: 1.8580
Your view: GBP is going to rise against EUR.
What should you do?
Intracommodity Spread:
June EUR: 1.5800 September EUR : 1.7500
Your view: Between June and September EUR will not
rise so much. What should you do?
Trade Unit
Settle Method
Cash Settled
Point
Descriptions
Contract
Listing
Strike Price
Interval
N/A
Product
Code
Clearing=T1
Ticker=TB
GLOBEX=GTB
DECEMBER 3, 2008
Contract
Last
Change
Open
High
Low
Prev.
Stl.
Dec '08
132-310
Mar '09
131-305
Jun '09)
130-250
+0-230
Sep '09
129-135
+0-230
Dec '09
128-015
+0-230