FUTURES CONTRACTS
A futures contract is an agreement between two parties: a short position, the party who agrees to deliver a commodity, and a long position, the party who agrees to receive a commodity. For example, a grain farmer would be the holder of the short position (agreeing to sell the grain), whereas the bakery would be the holder of the long position (agreeing to buy the grain).
In every futures contract, everything is specified precisely: the quantity and quality of the underlying commodity, the specific price per unit, and the date and method of delivery. The price of a futures contract is represented by the agreed-on price of the underlying commodity or financial instrument that will be delivered in the future. For example, in the preceding scenario, the price of the contract is 5,000 bushels of grain at a price of $4 per bushel, and the delivery date may be the third Wednesday in September of the current year.
The Forex market is essentially a cash or spot market in which over 90 percent of the trades are liquidated within 48 hours. Currency trades held longer than this normally are routed through an authorized commodity futures exchange such as the International Monetary Market (IMM). IMM was founded in 1972 and is a division of the Chicago Mercantile Exchange (CME) that specializes in currency futures, interest-rate futures, and stock index futures, as well as options on futures. Clearinghouses (the futures exchange) and introducing brokers are subject to more stringent regulations from the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and National Futures Association (NFA) than the Forex spot market.
It also should be noted that Forex traders are charged only a single transaction cost per trade, which is simply the difference between the current bid and ask prices. Currency futures traders are charged a round-turn commission that varies from brokerage house to brokerage house. In addition, margin requirements for futures contracts usually are slightly higher than the requirements for the Forex spot market.
CONTRACT SPECIFICATIONS
Table 2-1 presents a list of currencies traded through the IMM at the CME and their contract specifications.
Table 2-1 presents a list of currencies traded through the IMM at the CME and their contract specifications.
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| Table 2-1 Currency Contract Specifications |
Note: “Contract Size” represents one contract requirement, although some brokers offer minicontracts, usually one-tenth the size of the standard contract. “Months” identify the month of contract delivery. The tick symbols H, M, U, and Z are abbreviations for March, June, September, and December, respectively. “Hours” indicate the local trading hours in Chicago. “Minimum Fluctuation” represents the smallest monetary unit that is registered as 1 pip in price movement at the exchange and usually is one ten-thousandth of the base currency.
CURRENCY TRADING VOLUME
Table 2-2 summarizes the trading activity of selected futures contracts in currencies, precious metals, and some financial instruments. The volume and open interest (OI) readings are not trading signals. They are intended only to provide a brief synopsis of each market’s liquidity and volatility based on the average of 30 trading days.
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| Table 2-2 Futures Volume and Open Interest |
U.S. DOLLAR INDEX
The U.S. Dollar Index (ticker symbol DX) is an openly traded futures contract offered by the New York Board of Trade (NYBOT). It is computed using a trade-weighted geometric average of the six currencies listed in Table 2-3.
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| Table 2-3 U.S. Dollar Index Weights |
IMM currency futures traders monitor the U.S. Dollar Index to gauge the dollar’s overall performance in world currency markets. If the U.S. Dollar Index is trending lower, then it is very likely that a major currency that is a component of the U.S. Dollar Index is trading higher. When a currency trader takes a quick glance at the price of the U.S. Dollar Index, it gives the trader a good feel for what is going on in the Forex market worldwide. For traders who are interested in more details on commodity futures, we recommend Todd Lofton’s paperbound book, Getting Started in Futures (Wiley, 1993).
