Futures FX Market
Dr. J. D. Han
King’s College
University of Western Ontario
1
I. FX Futures
1. Rationales:
1) To overcome Lack of Liquidity of Forward Market, which
is mostly O.T.C.
-> Futures Market has Standardized Transactions, and is
Standing Market
-> Futures are Common men’s Forward Contract
2) To overcome the Credit/Default Risk
-> Third Party Market, Performance Bonds(Margin), etc.
3) Leverage
-> Leverage in futures trading means that the amount you
need to deposit is small in comparison to the amount of
product it will control.
2
2.
3
3. History and Currents of the
Futures Market:
• Chicago Mercantile Exchange started
FOREX Future Trading in 1972
• Daily average trading volume exceeds US $
100 billion
• Website of FX futures in CME
http://www.cmegroup.com/trading/fx/
4
4.
5
Standardized Contract Size
•
•
•
•
•
•
•
British Pound
Euro
Swiss Franc
Australian Dollar
Canadian Dollar
Chinese Yuan
Japanese Yen
62,500
125,000
125,000
100,000
100,000
1,000,000
12,500,000
6
6. Operation of Futures Market:
Daily Reconstructed/Settled Forward market
• Margin Deposit (=performance bonds=Initial
Deposit Requirement)
• Buy (take long-position) if you expect/need the
price of a currency to rise;
Sell (take short-position) if you expect/need it to
fall.
• Futures settlement price changes every day
• Profits or Losses are settled on a daily basis from a
mandatory margin account -> “Marking to
Market”
7
Numerical Example 1.
• British Pound 625,000 pounds
• Initial Margin = Performance Bonds
-$ 2,900 for hedgers
• Maintenance Margin = $ 2,6\900
8
•
•
•
•
•
Suppose you buy a unit at 1.4444 $ per Sterling Pound.
Initial Margin Requirement by CME = $2900 for a hedger
Suppose Actual Initial Margin Deposited =3000
Next day, the rate of GBP Futures falls to 1.4334
You have lost 11 points or 0.0110 dollar per Sterling Pound.
- For one unit has 62,500 pounds.
- You have lost 0.0110 dollar x 62,500 pounds for a unit of GBP
Futures = 687.5 dollars = Marking to the Market
• Margin Balance = 3000 – 687.5 = 2313.5
• Maintenance Margin set by CME = 2900
• Variation Margin Requirement to refill = 587.5
9
Numerical Example 2
• You are a Canadian exporter to U.S. and are
to receive U.S. 1 mil in 3 months, that is,
June 2010(t+1).
• How would you do FX Hedging in the
CME?
10
• To start:
Performance bond = U.S. $ 3300 for a hedger
• Mindset:
You have to put on the U.S. shoes-Act and think like you are a U.S. citizen
for SU.S $./C$
• What to do?
You are (buying/selling) Canadian Dollar Futures (CD) in CME, which will
expire/deliver on March 2010.
• How much?
Each unit = C $100,000
So you buy 1/S = 1/0.82 =about 12 units of CD for $100,000 for the
corresponding rate = 0.8159 at 10:25:30 AM CST 2/09/2009. Thus you
pay 0.8159 x 100,000 x 12 = U.S. $ 978,900. You have to get it from Spot
Market at the current Spot rate St.
11
• Forward Contract Suppose that at the expiry date in June
2009, the CD M06 is 0.8400. You win the net of (0.84000.8159) x 100,000 x 12 U.S. dollars. (St+1 – F) times 1
million -(a)
• Initial FX Risk Exposure of Business However, that
forward rate is close to the spot rate in June 2009. You
have lost (St+1 –St ) times 1 million –(b)
• (a) makes up the whole or part of (b).
-When F = St, then F-St = 0, it is a perfect coverage..
F- St is inevitable change not to be covered.
,
12