Tuesday, April 21, 2015

Futures Market

Currency futures are specific types of forward outright deals which
occupy in general a small part of the Forex market (See Figure 3.1). Because
they are derived from the spot price, they are derivative instruments. They
are specific with regard to the expiration date and the size of the trade
amount. Whereas, generally, forward outright deals—those that mature past
the spot delivery date—will mature on any valid date in the two countries
whose currencies are being traded, standardized amounts of foreign currency
futures mature only on the third Wednesday of March, June, September, and
There is a row of characteristics of currency futures, which make them
attractive. It is open to all market participants, individuals included. This is
different from the spot market, which is virtually closed to individuals - except
high net-worth individuals—because of the size of the currency amounts
traded. It is a central market, just as efficient as the cash market, and
whereas the cash market is a very decentralized market, futures trading takes
place under one roof. It eliminates the credit risk because the Chicago
Mercantile Exchange Clearinghouse acts as the buyer for every seller, and
vice versa. In turn, the Clearinghouse minimizes its own exposure by

requiring traders who maintain a non-profitable position to post margins equal
in size to their losses.
Moreover, currency futures provide several benefits for traders because
futures are special types of forward outright contracts, corporations can use
them for hedging purposes. Although the futures and spot markets trade
closely together, certain divergences between the two occur, generating
arbitraging opportunities. Gaps, volume, and open interest are significant
technical analysis tools solely available in the futures market. Yet their
significance extrapolates to the spot market as well.
Because of these benefits, currency futures trading volume has steadily
attracted a large variety of players.
For traders outside the exchange, the prices are available from on-line
monitors. The most popular pages are found on Bridge, Telerate, Reuters,
and Bloomberg. Telerate presents the currency futures on composite pages,
while Reuters and Bloomberg display currency futures on individual pages
shows the convergence between the futures and spot prices.

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