CURRENCY AND

INTEREST RATE

FUTURES

Introduction

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.

Future Contracts

• Major features

– Organised exchanges

– Standardisation

– Clearing House

– Initial margins

– Marking to Market

– Actual delivery is rare

Global Futures Exchanges

• IMM: International Monetary Market

• LIFFE: London International Financial Futures Exchange

• CBOT: Chicago Board of Trade

• SIMEX: Singapore International Monetary Exchange

• DTB: Deutsche Termin Bourse

• HKFE: Hong Kong Futures Exchange

Delivery date Customized Standardized

Participants Banks, brokers, Banks, brokers,MNCs. Public MNCs. Qualified

speculation not public speculationencouraged. encouraged.

Security Compensating Small securityDeposit bank balances or deposit required.

credit lines needed.

Clearing Handled by Handled byoperation individual banks exchange

& brokers. clearinghouse.Daily settlementsto market prices.

Comparison of the Forward & Futures Markets

Forward Markets Futures Markets

Contract size Customized Standardized

Regulation Self-regulating CommodityFutures Trading

Commission,National Futures

Association.

Liquidation Mostly settled by Mostly settled byactual delivery. offset.

Transaction Bank’s bid/ask NegotiatedCosts spread. brokerage fees.

Comparison of the Forward & Futures Markets

Forward Markets Futures Markets

Marketplace Worldwide Central exchangetelephone floor with worldwidenetwork communications.

FUTURES CONTRACTS

• Advantages of

Futures:

• 1) Easy liquidation

• 2) Well- organized and

stable market.

• 3) No credit risk

• Disadvantages

of Futures:

• 1) Limited to a few

currencies

• 2) Limited dates of

delivery

• 3) Rigid contract

sizes

The Futures trading Process

Is a system of open outcry on the trading floor of a centralized and regulated exchange

Increasingly, trading with electronic screens is becoming the preferred mode in many exchanges around the world.

Floor traders – trade for own account

Floor brokers – trade on behalf of others

Dual traders – do both

Variables to be negotiated in any deal are the price and the number of contracts

The Futures trading Process

The buyer of the Future acquires a long

position while the seller acquires a short

position

Exchange traded currency futures were launched in India

on August 29, 2008. As of now only USD-INR contracts

have been permitted with contract size of USD 1000 with

monthly maturities upto twelve months. The contracts will

be cash settled in INR. Contracts will expire on the last

working day of the month. Quotations will be given in rupee

terms.

Unlike OTC forwards, no underlying exposure is required to

trade in USD-INR futures. Individuals can also trade for

purely speculative purposes.

Margins will be calculated using a VAR framework.

Contracts have started trading on NSE. Eventually, they will

also be traded on MCX and BSE. Contracts between INR

and other currencies will be introduced later based on

perception of market interest.

Futures Price Quotations

• The Day’s opening price

• The highest price reached during day

• The Day’s lowest price

• Day’s closing price

• The change in the closing price of the

previous day

• The trading volume in the particular contract

• The settlement price of the prior day

• Number of contracts that are still outstanding

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 other’s creditworthiness.

• Standardized contracts with margin system

increase liquidity.

Protects clearing house; enhances financial

integrity of the exchange. Credit risk issues almost

eliminated

CLEARING

HOUSE

CLEARING MEMBER

A

CLEARING

MEMBER B

NON-CLEARING

MEMBER

CUSTOMER

CUSTOMER

NON-CLEARING

MEMBER CUSTOMER

CUSTOMER

TYPES OF ORDERS IN FUTURES MARKETSMarket Orders : Execute at best available price

Limit Orders: Sell above or buy below stated limits

Market If Touched or MIT Orders: Become market orders

if price touches a trigger

Stop-Loss Orders : Sell if price falls below a limit; buy if it rises

above a limit. Used to limit losses on existing positions

Stop Limit Orders : Stop loss plus limit

Time of Day Orders, Day Orders, Good Till Canceled(GTC)

Orders

Participants : Brokers, Floor Traders, Dual Traders, Futures

Commission Merchants. Hedgers and

speculators

both participate.

Currency Futures Contract Specifications

Exchange: IMM at Chicago Mercantile Exchange(CME)

British Pound Japan Yen

Size: £625000 ¥12,500,000

"Tick": $ 0002 per £ $0.000001 per ¥

(Per Contract) ($12.50) ($12.50)

Expiry Months: January, March, April, June, July, September,

October, December, & Spot Month (Both GBP and JPY)

Limit: NO LIMIT FOR THE FIRST 15 MINUTES OF TRADING. A

schedule of expanding price limits will be in effect when the 15-

minute period is ended. (Both GBP and JPY)

“Tick” : Minimum size of price movement.