Currency Futures and Option Markets
CHAPTER 7: CURRENCY FUTURES AND OPTION MARKETS
7.1 FUTURE CONTRACTS
7.1.1 Definition of future contract–> contracts written requiring a standard quantity of an available currency at a fixed exchange rate and at a set delivery date.
A future contract is defined as a contractual agreement to buy or sell an asset at a pre-determined price in the future. The contracts detail the quality and quantity of the underlying asset.
Background of currency futures in 1972: Chicago Mercantile Exchange (CME) opens International Monetary Market (IMM) CME began with grain and commodities future contracts more than a hundred years ago.
7.1.2 The International Monetary Market (IMM) provides: a) An outlet for hedging currency risk with future contracts (* explanation of hedging next page) b) Definition of future contracts (above) c) Main available futures currencies * EUR (Euro) - CHF (Swiss Franc) * GBP (Britain Pound) - BRL (Brazilian Real) * CAD (Canadian Dollar) - AUD (Australian Dollar) * JPY (Japanese Yen) - NZD (New Zealand Dollar) d) Standard contract sizes contract sizes differ for each of the available currencies. For example: EUR = 125.000 GBP = 62.500 e) Transaction costs : payment of commission to a trader f) Leverage is high the initial margin is required is relatively low, for example, less than 0, 2% of sterling contract value) g) Minimum price movements contracts set to a daily price limit restricting maximum daily price movements. If limit is reached, a margin call may be necessary to maintain a minimum margin. h) Global future exchanges that are competitors to the IMM: * DTB – Deutsche Termin Börse * LIFFE – London International Financial Futures Exchange * CBOT – Chicago Board of Trade * SIMEX – Singapore International Monetary Exchange * HKFE – Hong Kong Futures Exchange * NYMEX – New York Mercantile Exchange
*Hedging
7.1 FUTURE CONTRACTS
7.1.1 Definition of future contract–> contracts written requiring a standard quantity of an available currency at a fixed exchange rate and at a set delivery date.
A future contract is defined as a contractual agreement to buy or sell an asset at a pre-determined price in the future. The contracts detail the quality and quantity of the underlying asset.
Background of currency futures in 1972: Chicago Mercantile Exchange (CME) opens International Monetary Market (IMM) CME began with grain and commodities future contracts more than a hundred years ago.
7.1.2 The International Monetary Market (IMM) provides: a) An outlet for hedging currency risk with future contracts (* explanation of hedging next page) b) Definition of future contracts (above) c) Main available futures currencies * EUR (Euro) - CHF (Swiss Franc) * GBP (Britain Pound) - BRL (Brazilian Real) * CAD (Canadian Dollar) - AUD (Australian Dollar) * JPY (Japanese Yen) - NZD (New Zealand Dollar) d) Standard contract sizes contract sizes differ for each of the available currencies. For example: EUR = 125.000 GBP = 62.500 e) Transaction costs : payment of commission to a trader f) Leverage is high the initial margin is required is relatively low, for example, less than 0, 2% of sterling contract value) g) Minimum price movements contracts set to a daily price limit restricting maximum daily price movements. If limit is reached, a margin call may be necessary to maintain a minimum margin. h) Global future exchanges that are competitors to the IMM: * DTB – Deutsche Termin Börse * LIFFE – London International Financial Futures Exchange * CBOT – Chicago Board of Trade * SIMEX – Singapore International Monetary Exchange * HKFE – Hong Kong Futures Exchange * NYMEX – New York Mercantile Exchange
*Hedging