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Chapter_09

# Chapter_09 - Futures Contracts Preliminaries A futures...

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Futures Contracts: Preliminaries A futures contract is like a forward contract: It specifies that a certain currency will be exchanged for another at a specified time in the future at prices specified today. A futures contract is different from a forward contract: Futures are standardized contracts trading on organized exchanges with daily resettlement through a clearinghouse.

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Futures Contracts: Preliminaries Standardizing Features: Contract Size Delivery Month Daily resettlement Initial Margin (about 4% of contract value, cash or T-bills held in a street name at your brokers).

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Daily Resettlement: An Example Suppose you want to speculate on a rise in the \$/¥ exchange rate (specifically you think that the dollar will appreciate). Currently \$1 = ¥140. The 3-month forward price is \$1=¥150. Currency per U.S. \$ equivalent U.S. \$ Wed Tue Tue Japan (yen) 0.007142857 0.007194245 140 139 1-month forward 143 142 3-months forward 150 149 6-months forward 160
Daily Resettlement: An Example Currently \$1 = ¥140 and it appears that the dollar is strengthening. If you enter into a 3-month futures contract to sell ¥ at the rate of \$1 = ¥150 you will make money if the yen depreciates. The contract size is ¥12,500,000 Your initial margin is 4% of the contract value: \$1 \$3,333.33 .04 ¥12,500,000 150 ¥ = × ×

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Daily Resettlement: An Example If tomorrow, the futures rate closes at \$1 = ¥149, then your position’s value drops. Your original agreement was to sell ¥12,500,000 and receive \$83,333.33 But now ¥12,500,000 is worth \$83,892.62 \$1 \$83,892.62 ¥12,500,000 ¥149 = × You have lost \$559.28 overnight.
Daily Resettlement: An Example The \$559.28 comes out of your \$3,333.33 margin account, leaving \$2,774.05 This is short of the \$3,355.70 required for a new position. \$1 \$3,355.70 .04 ¥12,500,000 149 ¥ = × × Your broker will let you slide until you run through your maintenance margin. Then you must post additional funds or your position will be closed out. This is usually done with a reversing trade .

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Currency Futures Markets The Chicago Mercantile Exchange (CME) is by far the largest. Others include: The Philadelphia Board of Trade (PBOT) The MidAmerica commodities Exchange The Tokyo International Financial Futures Exchange The London International Financial Futures Exchange
The Chicago Mercantile Exchange Expiry cycle: March, June, September, December. Delivery date 3rd Wednesday of delivery month. Last trading day is the second business day preceding the delivery day. CME hours 7:20 a.m. to 2:00 p.m. CST.

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CME After Hours Extended-hours trading on GLOBEX runs from 2:30 p.m. to 4:00 p.m dinner break and then back at it from 6:00 p.m. to 6:00 a.m. CST. Singapore International Monetary Exchange (SIMEX) offer interchangeable contracts. There’s other markets, but none are close to CME and SIMEX trading
Basic Currency Futures Relationships Open Interest refers to the number of contracts outstanding for a particular delivery month.

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Chapter_09 - Futures Contracts Preliminaries A futures...

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