Foreign currency futures contract specifications

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Foreign Currency Futures Contract Specifications Maturity date – contracts mature on the 3 rd Wednesday of January, March, April, June, July, September, October or December Last trading day – contracts may be traded through the second business day prior to maturity date Collateral & maintenance margins – the purchaser or trader must deposit an initial margin or collateral At the end of each trading day, the account is marked to market and the balance in the account is either credited if value of contracts is greater or debited if value of contracts is less than account balance
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Foreign Currency Futures Contract Specifications Settlement – only 5% of futures contracts are settled by physical delivery, most often buyers and sellers offset their position prior to delivery date by taking offsetting positions The complete buy/sell or sell/buy is termed a round turn Commissions – customers pay a single commission to their broker to execute a round turn Use of a clearing house as a counterparty – All contracts are agreements between the client and the exchange clearing house. Therefore, there is no counter-party risk
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Using Foreign Currency Futures If an investor wishes to speculate on the movement of a currency can pursue one of the following strategies Short position – selling a futures contract based on view that currency will fall in value Long position – purchase a futures contract based on view that currency will rise in value
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Using Foreign Currency Futures Example (cont.): Amy believes that the value of the peso will fall, so she sells a March futures contract By taking a short position on the Mexican peso, Amy locks-in the right to sell 500,000 Mexican pesos at maturity at a set price above their current spot price Amy sells one March contract for 500,000 pesos at the settle price: $0.10958/Ps Value at maturity (Short position) = – Notional principal (Spot – Futures)
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Using Foreign Currency Futures To calculate the value of Amy’s position we use the following formula Using the settle price from the table and assuming a spot rate of $0.09450/Ps at maturity, Amy’s profit is If Amy believed that the Mexican peso would rise in value, she would take a long position on the peso Using the settle price from the table and assuming a spot rate of $0.11500/Ps at maturity, Amy’s profit is Value at maturity (Short position) = – Notional principal (Spot – Futures) Value = Ps500,000 ($0.09450/Ps $0.10958/Ps) = $7,540 Value at maturity (Long position) = Notional principal (Spot – Futures) Value = Ps500,000 ($0.11500/Ps $0.10958/Ps) = $2,710
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Foreign Currency Futures Versus Forward Contracts Forward Markets Futures Markets Contract size Customized. Standardized. Delivery date Customized. Standardized. Participants Banks, brokers, MNCs. Public speculation not encouraged Banks, brokers, MNC. Qualified public speculators.
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